THE  NEW  ECONOMICS 

By  CUMBERLAND  &  HAERISON 


THE  NEW  ECONOMICS 


THE 

NEW  ECONOMICS 


BY 


MARTEN  CUMBERLAND 


AND 


RAYMOND      HARRISON 


LONDON 

CECIL  PALMER 

OAKLEY  HOUSE,  BLOOMSBURY  STREET,  W.C.: 


/7/ 


FIRST 
EDITION 
1922 
COPY 
RIGHT 


PRINTED   IN   GREAT   BRITAIN   AT 
THE   NORTHUMBERLAND   PRESS   LIMITED,    NEWCASTLB-UPON-TYNE 


PREFACE 

BY  a  strange  trick  of  fate,  social  economics 
has  come  to  be  regarded  by  the  majority  as 
a  monopoly  of  the  professors,  though  no 
subject  is  so  intimately  connected  with  the 
affairs  of  everyday  life. 

The  business  man  who  finds  that  a  period 
of  good  trade  inevitably  gives  place  to  a 
period  when  trade  is  slack  and  "  no  one  is 
buying " ;  the  housewife,  surveying  with 
dismay  a  continuous  rise  in  prices ;  the 
householder,  writing  to  his  daily  paper  to 
complain  of  high  taxation  (which  he  has  been 
taught  to  associate  with  nothing  more 
fundamental  than  the  "  wastefulness  of 
Government  Departments  ") ;  the  workman 
who  goes  on  strike  for  higher  wages  to  meet 
the  increased  cost  of  living;  the  employer 
who  declares  a  lock-out  to  reduce  wages, 

when  trade  is  bad ;  the  ex-service  man  who 
vii 


viii  Preface 


marches  the  streets  in  a  vain  hunt  for  work 
— all  are  alike  victims  of  the  economic 
system,  though  they  may  be  ignorant  of  the 
workings  of  the  system  on  which  they  are 
dependent  for  life  itself. 

The  general  public  are  content  to  regard 
economics  as  a  subject  beyond  their  com- 
prehension, and  the  workings  of  our  financial 
system  as  a  mystery  not  to  be  penetrated  by 
the  many ;  and  to  preserve  this  illusion,  the 
public,  it  must  be  admitted,  are  quite 
prepared  to  suffer. 

We  live  to-day,  owing  to  the  failure  of  our 
financial  system,  in  a  world  of  high  prices, 
unemployment  and  imminent  war.  The 
last  century  has  witnessed  rapid  develop- 
ments in  the  productive  processes,  yet  our 
credit-system,  which  exists  to  distribute  the 
product  of  industry  and  should  have  adapted 
itself  to  the  requirements  of  large-scale 
production,  is  still  in  the  hands  of  the 
moneylenders;  so  that  the  general  standard 
of  living  is  lower  to-day  than  it  was  before 
the  beginnings  of  machine  production. 

The  remedy  for  our  ills,  the  adoption  of 


Preface  ix 


a  sane  credit-system,  has  been  made  public 
in  the  writings  of  Mr  C.  H.  Douglas;  but 
against  the  petty  jealousy  of  our  "  labour 
leaders  "  and  "  social  reformers  "  and  the 
sturdy  indifference  of  the  masses,  the  truth 
is  no  longer  mighty  and  may  not  prevail. 

We  wish  we  could  persuade  the  average 
individual  that  he  has  not  solved  the 
problems  of  government  when  he  has  voted 
a  number  of  time-servers  into  Parliament  or 
on  to  the  executive  of  his  Trade  Union. 
The  politician  and  "  labour  leader  "  are  not 
as  a  rule  more  intelligent  than  other  men, 
but  only  more  personally  ambitious ;  and 
there  is  really  no  reason  why  the  commonalty 
should  permit  them  to  do  its  thinking. 

There  may,  perhaps,  be  some  excuse  for 
the  public  ignorance.  The  Press  is  corrupt, 
practically  without  exception;  and  the 
average  text-book  on  economics,  penned  by 
some  professor  or  other,  might  well  have 
been  written  in  the  Dark  Ages,  so  closely 
will  it  cling  to  the  superstitions  that  were 
then  prevalent. 

The   ideas   of   Mr   C.    H.   Douglas,   first 


Preface 


published  in  "  The  New  Age,"  have 
revolutionised  thought  on  this  subject.  For 
those,  however,  who  have  no  previous 
knowledge  of  economics  and  the  intricacies 
of  the  financial  mechanism,  some  preliminary 
survey  will  be  found  useful,  and  this  the 
present  volume  is  intended  to  supply. 

Beginning  with  simple  definitions,  it 
discusses  the  current  economic  system  and 
leads  up  by  easy  stages  to  the  Douglas 
analysis,  which  it  professes  to  explain  in 
simple  language  that  can  be  understood  by 
everyone. 

We  trust  that  readers  will  not  be  satisfied 
with  a  mere  perusal,  but  that  they  will  press 
for  a  public  inquiry  into  our  credit-system. 
In  apathy,  we  are  fighting  against  civilisation 
just  as  surely  as  if  we  were  actively  allied 
to  the  forces  that  are  working  for  destruction. 
There  is  not  a  day  to  be  lost?  in  the  short 
space  of  time  now  at  our  disposal,  if  we  are 
to  prevent  Europe  from  slipping  back  into 
the  night  of  barbarism. 


CONTENTS 


FACE 


PREFACE  .  .  .  .  .  vii 

INTRODUCTION 
The  Meaning1  of  Economics  I 

CHAPTER  ONE 
Wealth  and  Money       .....          5 

CHAPTER  TWO 

Labour  and  Capital       .  .  ,  .  .17 

CHAPTER  THREE 

Production  and  Development  ...  27 

CHAPTER  FOUR 

Demand  and  Distribution        .  .  .  -31 

CHAPTER  FIVE 

Work  and  Wages         .  .  .  .  .        38 

CHAPTER  SIX 
Credit  and  Banking       .  .  .  .  .44 

CHAPTER  SEVEN 
A  Standard  of  Value    .....        53 


xii  Contents 


CHAPTER  EIGHT 
Foreign  Exchange          .  .  .  .  .65 

CHAPTER  NINE 

Rates  of  Exchange         ...  .  .72 

CHAPTER  TEN 
The  Control  of  Credit 80 

CHAPTER  ELEVEN 
Commercial  Prosperity  .  .  .  .85 

CHAPTER  TWELVE 

The  Mismanagement  of  Industry       .  .  .91 

CHAPTER  THIRTEEN 

Malthus— and  Other  Night  Fears      .  .  .100 

CHAPTER  FOURTEEN 
The  Fight  for  Export  Markets  .  .  .113 

CHAPTER  FIFTEEN 

How  Prices  are  Fixed   .  .  .  .  .122 

CHAPTER  SIXTEEN 
The  New  Economics      .....      131 


INTRODUCTION 

THE    MEANING  OF   ECONOMICS 

THE  subject  of  Economics  has  earned  for 
itself,  in  the  past,  the  undesirable  nickname 
of  "  the  dismal  science."  It  has,  unhappily, 
well  deserved  it.  Partly  through  ignorance 
and  loose  thinking,  partly  through  the  urge  of 
vast  pecuniary  "  interests,"*  it  has  generally 
arrived  at  conclusions,  which,  if  true,  would 
render  the  great  mass  of  mankind  devoid  of 
any  material  hope  for  the  future. 

Luckily  the  main  conclusions  of  men  like 
Adam  Smith,  Ricardo,  Malthus,  J.  S.  Mill, 
etc.,  are  rapidly  proving  themselves  false. 
New  spirits  and  new  minds  are  approaching 
the  subject  of  Economics  and  revealing  fresh 
and  wonderful  truths, — truths  which,  when 
appreciated  by  the  million,  will  show  a 

A 


The  New  Economics 


glorious  future  lying  before  us,  represented 
in  practical,  tangible  things,  which  we  have 
but  to  stretch  out  our  hands  to  grasp  and 
make  our  own. 

The  word  Economics  is  of  Greek  origin, 
and  means,  simply,  the  law  of  the  house,  or 
the  science  of  household  management.  The 
business  of  National  Economics  consists, 
simply,  in  supplying  the  community  in  the 
most  economical  fashion  with  the  things  it 
requires. 

The  problem  each  nation  is  confronted 
with  is  how  to  feed,  clothe,  and  adequately 
house  her  population.  The  nation  that  fails 
in  achieving  this  has  failed  in  her  Economics, 
however  great  and  glorious  she  may  appear. 
Such  a  country  would  be  in  precisely  the 
condition  of  the  housewife  who  failed  to 
provide  food  and  clothes  for  her  husband  and 
children.  She  may  dress  beautifully,  the 
house  may  be  nicely  painted  outside,  yet  she 
fails  as  a  housewife  if  her  domestic  economy 
is  bad. 


The  Meaning  of  Economics 


The  first  demand  of  the  community  is  for 
necessities ;  luxuries  are  a  secondary  matter. 
In  a  primitive  state  of  society,  where  science 
is  undeveloped  and  labour  is  imperfectly 
organised,  absolute  necessities  are  the  only 
things  produced.  Then,  as  the  inventiveness 
of  mankind  develops,  and  the  introduction  of 
mechanical  aid  and  effective  co-operation  of 
labour  follows,  the  community's  power  to 
produce  the  goods  required  increases  rapidly. 
Thus  more  and  more  goods  are  produced  by 
less  and  less  labour,  until  the  community  finds 
it  has  labour  to  spare.  Its  labour  is  rapidly 
growing  in  value  to  the  community  as  its 
potentiality  to  produce  increases.  It  is  the 
business  of  national  economy  to  decide  how 
the  community  shall  exert  its  labour,  in  the 
most  productive  and  economical  fashion. 

Society's  control  and  direction  of  her 
productive  powers  and  her  supervision  over 
the  distribution  of  things  produced  are  vitally 
important  matters.  As  her  productive  powers 
are  used  or  misused,  husbanded  or 


The  New  Economics 


squandered,  so  will  she,  as  a  corporate  whole, 
be  either  well  provided  for  or  miserably  poor. 
The  consideration  of  the  production  of  things 
required  and  their  proper  distribution  among 
those  who  need  them  is  the  subject  matter  of 
Economics. 


CHAPTER   ONE 

WEALTH     AND     MONEY 

FOR  purposes  of  economic  exposition, 
philosophic  conceptions  and  theories  as  to 
how,  and  why,  humanity  tends  to  come 
together  and  form  huge  social  aggregates 
need  not  concern  us.  We  shall  merely  accept 
the  accomplished  fact  of  organised  society 
and  regard  it  from  the  economic  standpoint. 

The  wealth  of  any  given  society  is  its 
capacity  to  produce  and  distribute  among 
its  members  such  commodities  as  its  members 
require.  The  two  sources  of  potential  wealth 
are  those  which  lie  latent  in  Nature  (exclusive 
of  man),  and  those  which  lie  latent  in  man 
himself.  Both  these  two  factors  are  necessary 
for  the  production  of  economic  wealth. 


6  The  New  Economics 

In  Nature  lies  a  huge  potential  wealth 
awaiting  development  and  cultivation  from 
the  powers  of  man. 

Now  the  wealth  of  any  given  society, 
regarded  from  the  point  of  view  of  man- 
power, grows  with  increase  of  population  and 
with  the  increased  knowledge,  skill,  organisa- 
tion, and  discovery  of  that  society.  With 
each  increase  in  the  number  of  workers,  with 
every  addition  to  their  knowledge  and  skill, 
the  human  industrial  machine,  of  hand  and 
brain,  can  produce  more  from  the  natural 
medium  upon  which  this  particular  society 
expends  its  efforts.  And  this  wealth  grows 
with  the  progress  of  science,  with  the 
growth  of  inherited  culture  and  the  improved 
organisation  of  society's  resources. 

Thus  the  brains  of  the  scientist,  the 
muscles  of  the  labourer,  the  wheels  of  the 
machine,  and  the  wires  of  the  telegraph  are 
all  potential  wealth.  When  exercised  in  the 
right  direction  they  can  all  add  to  society's 
capacity  to  produce  and  distribute,  among 


Wealth  and  Money 


its  members,  such  commodities  as  its  members 
require. 

It  is  important  to  note  that  these  things 
are  potential  wealth  only — they  will  not  result 
in  real  wealth  for  society  unless  they  are 
employed  in  the  production  and  distribution 
of  the  real  needs  of  society.  So,  if  the  brains 
of  the  scientist  produce  poison-gas,  the 
muscles  of  the  labourer  thrust  with  a 
bayonet,  the  wheels  of  the  machine  turn  out 
shells,  and  the  wires  of  the  telegraph  carry 
messages  of  death,  then,  however  necessary 
they  may  be  at  the  time,  society,  as  a 
whole,  will  not  be  the  wealthier  for  these 
efforts. 

Again,  if  the  brains  of  the  scientist  are 
concentrated  on  some  obscure  point  in 
numismatics,  if  the  muscles  of  the  labourer 
are  exercised  in  football,  if  the  wheels  of  the 
machine  produce  brown-paper  "  boots,"  and 
the  wires  of  the  telegraph  convey  race-course 
information,  then,  however  pleasurable  these 
things  may  seem  at  the  time,  society,  as  a 


8  The  New  Economics 

whole,  will  not  be  much  wealthier  for  these 
efforts. 

It  cannot  be  emphasised  too  much  that,  as 
society's  productive  powers  are  used  or  mis- 
used, husbanded,  or  squandered,  so  will  it, 
as  a  corporate  whole,  be  well  provided  for  or 
miserably  poor. 

The  production  of  wealth  in  any  society 
progresses  from  the  production  of  the  barest 
necessities  to  the  production  of  the  most 
elaborate  conveniences  and  the  most 
delightful  luxuries. 

In  a  primitive  state  of  society  little  more 
than  the  barest  necessities  are  produced,  and 
these  few  commodities  are  exchanged  and 
distributed  by  the  simple  process  of  barter. 
As  society  becomes  more  complex  and  more 
highly  organised  a  great  many  more  com- 
modities are  produced,  the  need  for  a  more 
rapid  method  of  distribution  and  exchange 
arises,  the  old  system  of  barter  is  found 
cumbersome  and  inadequate,  and  money  is 
introduced.  Money  is  an  important  part  of 


Wealth  and  Money 


the  industrial  machine;  it  is  an  instrument 
created  by  society  to  facilitate  the  exchange 
and  distribution  of  the  goods  that  society  has 
produced. 

In  a  highly-organised  civilisation,  and 
stable  state  of  society,  money  will  assume 
value  in  proportion  to  the  quantity  of  goods 
it  will  command.  Money,  therefore,  may  be 
regarded  as  a  liquid  symbol — a  moveable 
token — of  actual,  concrete  goods — goods 
that  perhaps  are  not  liquid  or  easily  move- 
able  themselves.  Thus,  money,  carried  in 
the  waistcoat  pocket,  may  represent  and 
command  huge  machines  which  a  hundred 
men  could  not  move,  and  so  money  greatly 
facilitates  exchange  by  becoming  the  recog- 
nised token  of  tangible  commodities. 

Money,  of  itself,  has  no  value.  To  talk  of 
the  "  intrinsic  value  "  of  money  is  to  employ 
a  meaningless  phrase.  Money  has  no  value 
except  as  it  will  exchange  for  actual,  concrete 
goods.  The  exchange  value  of  money  rests 
entirely  on  the  belief  which  society,  as  a 


10  The  New  Economics 

whole,  has  in  the  power  of  this  money,  to 
command  other  goods.  In  other  words,  it 
rests  on  credit — that  is,  on  society's  ability 
to  produce.  Later  on  we  shall  deal  more 
thoroughly  with  the  question  of  credit.  At 
present  let  us  get  this  question  of  the 
"  value  "  of  money  quite  clear,  for  it  is  an  im- 
portant one,  upon  which  many  things  hang. 
Money  has  been  made  out  of  a  variety  of 
materials,  gold,  silver,  copper,  nickel,  paper, 
porcelain,  salt,  shells,  etc.,  etc. — still,  in  itself, 
as  money,  it  has  no  intrinsic  value.  For 
example,  gold  has  a  value  from  a  point  of 
view  of  utility,  ornament,  etc.  Sovereigns 
could  be  melted  down  and  made  into  plate, 
jewellery,  artificial  teeth,  or  fountain  pen 
nibs,  and  if  this  were  done  they  would  then 
have  value  as  plate,  jewellery,  etc.,  but  not 
as  money,  The  value  that  money  has,  as 
money,  is  purely  arbitrary — a  value  which 
society  could  give  to  many  things  by  restrict- 
ing their  circulation  and  declaring  these 
things  legal  tender. 


Wealth  and  Money  11 

This  value,  then,  depends  upon  what  these 
units  of  exchange  can  effectively  demand  in 
goods  required.  You  do  not  get  value  for 
money  until  you  exchange  it  for  something, 
and  the  value  you  get  then  is  a  personal 
value  resting  ultimately  upon  a  perception  of 
your  mind. 

Suppose  three  men  have  each  ten  pounds. 
One  buys  a  violin,  another  a  suit  of  clothes, 
the  third  a  bottle  of  wine,  all  three  may  be 
perfectly  satisfied  that  they  have  "  value  "  for 
their  money — yet  all  three  might  be  dis- 
satisfied if  they  received  one  of  the  other 
purchases  for  their  ten  pounds.  This  will  be 
so  even  supposing  the  market  "  value  "  of  the 
violin,  the  suit  of  clothes,  and  the  bottle  of 
wine  is  ten  pounds  per  item. 

This  shows  us  the  difference  between 
absolute  value — what  might  be  termed 
philosophic  value — and  economic  value. 
Economics  have  nothing  to  do  with  the 
former  value,  but  in  order  to  avoid  confusion 
of  thought  it  is  well  to  note  the  difference. 


12  The  New  Economics 

If  society  decides  to  use  a  metal  like  gold 
for  its  currency,  and  fixes  a  certain  arbitrary 
value  upon  pieces  of  gold  at  a  certain  weight, 
then  of  course  all  the  gold  outside  the 
currency  immediately  acquires  equal  value. 
The  gold  then  made  into  plate,  jewellery, 
artificial  teeth,  and  fountain  pen  nibs  can  now 
be  melted  down,  converted  into  sovereigns, 
and  command  goods  in  the  market  as  legal 
tender.  Should  society  abolish  stamped 
golden  coinage  as  their  currency,  and  intro- 
duce stamped  paper  exclusively,  then  the 
value  of  gold  would  return  to  its  more  real 
value  in  ratio  to  the  utility  and  pleasure  it 
afforded  people,  that  is  the  value  which 
rests  on  people's  opinion  of  a  thing,  which  is 
an  aspect  of  the  mind.  Whatever  society 
manufactures  its  money  out  of,  and  whatever 
it  declares  legal  tender,  the  total  spending 
power  in  a  country,  at  any  given  time,  can 
only  command  such  goods  as  that  society  is 
producing  and  distributing  in  the  market  at 
this  time. 


Wealth  and  Money  13 

The  criterion,  therefore,  by  which  we 
measure  a  country's  currency  should  be  its 
capacity  to  produce  goods.  Anything  which 
tends  to  hinder  its  production  of  goods 
renders  its  money  less  valuable  in  an  equal 
degree — and  vice  versa. 

We  see  this  when  we  consider  money  paid 
to  labour  in  the  form  of  wages  and  salaries. 
This  money  represents  an  acknowledgment  of 
debt  from  the  employer  to  the  employee,  or, 
to  take  a  wider  view,  from  the  community  to 
the  individual.  It  is  recognised  that  the 
individual,  by  the  performance  of  some 
work,  has  taken  some  share  in  society's  com- 
mon task  of  production  and  distribution. 
His  salary  or  wages  represents  his  share  in 
the  additional  wealth  of  society  that  his 
labour  has  facilitated.  Let  us  suppose  he 
is  paid  five  pounds.  A  moment's  thought  will 
show  that  this  five  pounds  has  no  "  intrinsic 
value,"  and  will  not  become  real  wealth  until 
he  exchanges  it  for  such  in  the  shape  of  com- 
modities. Now  it  is  also  obvious  that  he  can 


14  The  New  Economics 

only  buy  with  his  five  pounds  what  is  in  the 
market  to  be  bought — that  his  five  pounds 
will  represent  much  or  little  as  the  market  is 
well  or  badly  stocked  with  goods.  Here  we 
see  at  once  how  society's  production  affects 
the  individual  and  also  how  a  country, 
regarded  as  a  collection  of  individuals,  must 
be  considered  rich  or  poor,  according  to  how 
her  production  is  employed  well  or  badly.  A 
country  that  produces,  in  her  markets,  an 
abundance  of  the  commodities  that  her  popu- 
lation desires,  and  also  distributes  these 
commodities  with  justice  and  facility,  is 
wealthy — a  country  that  fails  to  do  this  is 
poor.  The  question  of  foreign  exchange 
does  not,  of  course,  affect  the  truth  of  this 
statement.  As  society  gets  more  complex 
and  more  highly  organised  countries  grow 
more  and  more  inter-dependent.  They 
begin  to  barter  and  trade  with  one  another, 
exchanging  with  their  neighbours  those  goods 
which  they  produce  easily  and  economically 
for  those  goods  which  their  neighbours  can 


Wealth  and  Money  15 

produce  more  easily  and  economically  than 
they  could  themselves.  National  economy 
always  remains  a  question  of  how  to  provide 
the  community  with  an  abundance  of  the 
things  they  require  by  the  most  efficient  and 
economical  means.  This  is  only  done  by 
controlling  the  society's  means  of  production 
and  directing  it  with  the  least  possible 
waste. 

To  recapitulate,  society's  wealth  lies  in  the 
latent  productive  forces  of  nature  and  in  the 
latent  productive  forces  of  man  exerted  on 
this  natural  medium. 

Society's  wealth  is  its  production  of  the 
things  it  requires  from  the  natural  potential 
wealth. 

This  wealth  grows  according  as  society's 
control  and  direction  of  its  powers  of  pro- 
duction and  distribution  is  directed  more 
and  more  efficiently.  It  diminishes  where 
society's  powers  of  production  are  mis- 
directed and  wasted.  So  society's  real 
tangible  wealth  is  that  which  it  has  been 


16  The  New  Economics 

able  to  produce  (directly  or  by  exchange)  and 
distribute  among  its  members. 

Money  is  the  medium  of  exchange — the 
circulating  mechanism  of  industrial  society, 
by  means  of  which  commodities  are 
exchanged  and  distributed.  Money  has  no 
intrinsic  value,  but  only  an  exchange  value. 
The  value  of  money  to  the  individual 
depends  upon  its  effective  demand  or  the 
goods  it  can  purchase  in  the  market  at  any 
given  time. 


CHAPTER  TWO 

LABOUR     AND     CAPITAL 

LABOUR  is  a  source  of  potential  wealth  lying 
latent  in  man — as  distinct  from  the  potential 
wealth  which  lies  latent  in  nature — man's 
environment. 

Labour,  or  man's  energies,  muscular  and 
mental,  must  be  exerted  on  the  natural 
medium  which  forms  his  environment  before 
economic  wealth  is  produced. 

Nature  produces,  spontaneously,  the  mul- 
titudinous needs  of  man,  but  seldom,  if  ever, 
in  precisely  the  form  that  man  requires  these 
things  in. 

Suppose  a  tropical  island,  upon  which  a 
prolific  nature  produces  fruit,  vegetables,  and 
berries  that  man  needs  for  his  food;  still, 

man's  labour  must  be  exerted  for  the  procur- 

B 


18  The  New  Economics 

ing  of  this  fruit,  etc.,  and  often  more  labour 
is  needed  to  prepare  it  for  consumption. 

So  even  the  most  primitive  needs  of  man 
require  the  exertion  of  labour  for  their  ful- 
filment. 

In  a  highly  organised  civilisation  the  needs 
of  man  become  more  and  more  elaborate 
and  complex  as  his  labour  becomes  more 
cultivated  and  capable.  It  is  characteristic 
of  man  that  his  desires  are  generally  ahead 
of  his  actual  achievement,  and  the  progress 
of  civilisation,  considered  economically,  is 
largely  one  of  satisfying  the  ever-growing 
needs  and  requirements  of  the  community. 

A  labourer,  then,  is  one  who  aids  in  the 
production  of  economic  wealth.  He  may  do 
this  either  by  the  exercise  of  his  mental  or 
his  physical  capacities.  The  scientist,  who 
discovers  a  new  force  in  nature,  and  turns 
it  to  man's  use;  the  clerk,  whose  book- 
keeping is  a  necessary  part  of  some 
industrial  organisation ;  the  driver  of  a  motor 
lorry  which  carries  goods  from  one  place  to 


Labour  and  Capital  19 

another — all  these  are  labourers,  inasmuch 
as  they  facilitate  production  or  distribution, 
which  is  an  essential  part  of  our  industrial 
organisation. 

The  old  economists  were  careful  to  differ- 
entiate between  what  they  called  productive 
and  unproductive  labour.  In  a  highly 
organised  state  of  society  it  becomes  a  very 
difficult  matter  to  decide  whose  labour  does 
facilitate  production,  and  whose  does  not. 
There  are  men  who  are  obviously  producers 
of  wealth ;  there  are  men  who  bring  the  com- 
modity produced  to  the  market  where  it  is 
needed.  There  are  men  whose  labour  en- 
hances the  value  of  goods  produced — value, 
that  is,  in  utility  or  in  the  pleasure  the 
goods  will  give  us.  There  are  men  who 
facilitate  the  distribution  of  goods,  and  men 
who  serve  the  producers,  and  therefore 
make  them  more  productive.  In  fact,  in  a 
highly  complex  and  efficiently  organised 
state  of  society,  many  will  facilitate  the 
increase  of  production  by  most  diverse  and 


20  The  New  Economics 

indirect  methods.  Much  ingenuity  might 
be  expended  in  making  distinctions  which 
would  only  produce  a  poor  result  for  our 
efforts.  We  will  content  ourselves  with 
saying  that  the  most  productive  labour  is  that 
labour  which  is  exerted  in  a  manner  most 
likely  to  facilitate  production  at  any  given 
time. 

As  labour  is  exerted  more  and  more 
efficiently,  society  grows  wealthy;  it  grows 
rich  in  many  possessions,  and  most  of  these 
possessions  are  termed  capital.  Nearly  all 
capital  is  the  direct  production  gf  labour, 
but  there  are  exceptions,  as  land,  air  and 
water.  We  will  deal  with  these  exceptions 
first.  Now  we  said  in  our  first  chapter, 
"  society's  two  sources  of  potential  wealth 
are  those  which  lie  latent  in  nature  (exclu- 
sive of  man),  and  those  which  lie  latent  in 
man  himself.  Both  these  two  factors  are 
necessary  for  the  production  of  economic 
wealth.  In  nature,  lies  a  huge  potential 
wealth  awaiting  development  and  cultiva- 


Labour  and  Capital  21 

tion  from  the  powers  of  man."  Now  it  is  an 
essential  characteristic  of  capital  that  it 
should  be  a  factor  in  production  and  distri- 
bution, just  as  labour  is.  So,  then,  that 
land,  air  and  water  which  become  a  factor 
in  production  become  automatically  capital. 
The  land  cultivated  by  the  farmer  is  his 
capital;  the  air,  or  its  component  parts, 
utilised  by  the  chemist  becomes  his  capital ; 
the  water,  fresh  or  salt,  cultivated  by  the 
professional  fisherman  becomes  his  capital. 
All  these  natural  elements,  as  they  are 
utilised  for  production,  are  capital;  when 
they  are  not  so  utilised  they  are  wealth,  but 
not  capital. 

Here  it  becomes  necessary  to  draw  a  dis- 
tinction between  wealth  and  capital.  All 
capital  is  wealth,  but  all  wealth  is  not 
capital.  The  land — land  laid  out  as  a 
pleasure  garden,  with  beautiful  trees,  flowers, 
and  shady  lawns — may  justly  be  regarded  by 
its  owner  as  wealth  for  the  pleasure  and 
delight  it  may  give  him;  it  is  not  capital 


22  The  New  Economics 

unless  he  diverts  it  from  a  pleasure  garden 
to  something  else,  say,  a  kitchen  garden  or  a 
"  show  place,"  in  which  he  charges  for 
entrance. 

In  the  same  way  the  air,  good  or  bad, 
which  society  breathes  may  be  regarded  as 
wealth — yery  real  wealth — since  without  it 
we  should  be  dead;  but  it  is  not  capital. 

Similarly,  a  pond  in  a  public  park  which  is 
retained  only  for  the  beauty  it  adds  to  the 
scenery,  may  legitimately  be  looked  upon 
as  public  wealth;  it  is  not  public  capital. 

Here  we  see  the  distinction  between 
economic  wealth  and  wealth  in  the  broadest 
sense  of  the  word.  Much  of  society's  very 
real  wealth  is  purely  a  matter  of  pleasure, 
beauty,  and  delight. 

In  an  economic  survey  we  are  only  con- 
cerned with  economic  wealth — things  that 
play  a  direct  part  in  production  and  distri- 
bution ;  we  are  only  concerned  with  the  other 
wealth  of  pleasure  and  beauty  inasmuch  as 
it  may  be  changed  to  economic  wealth.  To 


Labour  and  Capital  23 

take  the  above  examples,  the  pleasure  garden 
might  be  capitalised,  i.e.,  turned  into  a 
source  of  economic  wealth  by  its  owner. 
The  air  we  breath  may  be  capitalised  by  the 
chemist  making  it  compressed  air  and  using 
it  as  an  instrument  of  production.  The  pond 
in  the  public  park  may  be  capitalised  by 
putting  boats  on  it  and  hiring  the  boats  out. 
We  see,  therefore,  that  this  wealth  of  beauty 
and  pleasure  has  often  a  capital  value,  and 
may,  in  fact,  be  turned  into  capital.  As  we 
have  pointed  out  in  the  previous  chapter, 
the  ultimate  value  of  all  wealth  to  the 
individual  rests  on  a  perception  of  the  mind 
— that  is,  what  the  individual  thinks  of  it. 
A  picture  will  be  wealth  to  a  private  owner 
according  to  what  he  thinks  of  it;  if  he 
thinks  much  of  it,  it  may  afford  him  infinite 
delight  and  pleasure.  If  he  set  up  a  picture 
shop  and  wishes  to  capitalise  his  picture,  its 
value  in  exchange  will  depend  upon  what 
others  think  of  it,  and  what  they  can  be 
induced  to  give  for  it. 


24  The  New  Economics 

The  science  of  economics  is  not  concerned 
with  questions  of  beauty  and  pleasure,  but 
only  of  utility,  though,  as  we  have  seen, 
beauty  and  pleasure  sometimes  obtrude. 

We  see,  then,  that  land,  air,  and  water  are 
capital  when  they  play  some  part  in  the 
economic  life  of  the  community,  and  become 
a  means  of  production  and  distribution. 
When  this  is  so,  land,  air,  and  water  become 
the  economic  tool  of  man,  and  in  this  phrase 
we  define  all  capital  whatsoever. 

Capital  is  the  economic  tool  of  man; 
that  wealth  which  man  utilises  to  facilitate 
production  and  distribution  of  economic 
wealth — whether  such  wealth  be  the  product 
of  man  or  the  spontaneous  offering  of 
nature. 

In  the  progress  of  civilisation,  the  exer- 
tion of  labour  precedes  the  accumulation  of 
capital.  Capital,  then,  is  the  product  of 
labour,  and  a  certain  development  of  the 
organised  resources  of  society  will  be  neces- 
sary before  capital  can  be  accumulated  in 


Labour  and  Capital  25 

abundance.  The  accumulation  of  capital  in 
the  form  of  more  and  more  efficient  tools, 
machinery,  etc.,  will  greatly  increase  society's 
potentiality  to  produce  and  distribute  the 
things  it  needs.  Society's  wealth,  actual  and 
potential,  increases,  then,  with  her  accumu- 
lation of  capital.  The  improvement  in 
society's  tools  of  production  and  distribution 
acts  in  a  similar  manner  to  society's  improved 
methods  of  labour — that  is,  more  is  pro- 
duced by  less  work. 

Money,  of  course,  is  a  part  of  capital, 
since,  as  we  have  already  seen,  it  is  one  of 
the  great  tools  of  distribution. 

To  recapitulate,  labour  is  a  source  of 
potential  wealth,  lying  latent  in  man,  which 
must  be  exerted  upon  the  natural  medium 
which  forms  man's  environment  before 
economic  wealth  is  produced. 

A  labourer  is  one  who  aids  in  the  produc- 
tion of  economic  wealth,  either  by  the 
exercise  of  his  mental  or  physical  capacities. 

Capital  is  the  economic  tool  of  man,  play- 


26  The  New  Economics 

ing  its  part  in  the  production  of  economic 
wealth.  Land,  air  or  water  can  only  be  con- 
sidered capital  when  they  become  factors  in 
production  and  are  utilised  as  the  economic 
tool  of  man. 


CHAPTER   THREE 

PRODUCTION     AND     DEVELOPMENT 

WE  have  seen  that  there  are  two  main  factors 
in  the  production  of  the  needs  of  mankind 
—Labour  and  Capital ;  and  that  in  the  term 
Capital  we  include  land  and  water  when 
these  natural  elements  are  utilised  by  man 
as  his  economic  tool  for  the  production  of 
economic  wealth. 

The  end  of  production  is  to  supply  the 
needs  of  the  community.  Production  is  not 
an  end  in  itself,  neither  is  consumption ;  both 
are  merely  necessities  of  existence.  That 
is  to  say,  speaking  generally,  production  and 
consumption  are  not  undertaken  merely  for 
the  joy  and  pleasure  they  impart,  but  simply 
because  they  are  necessary  functions  of 
life. 


28  The  New  Economics 

Broadly  speaking,  there  are  two  classes 
of  commodities  produced  by  the  united 
forces  of  man  and  nature ;  these  are  ultimate 
consumable  commodities  (those  which  supply 
a  comparatively  immediate  need),  and  capital 
goods  (those  which  supply  a  more  distant 
need,  such  as  machines,  tools,  etc.,  all  of 
which  take  their  part  in  further  production). 

In  a  primitive  state  of  society,  man's 
production  will  consist  chiefly  of  ultimate 
consumable  commodities — that  is,  the  im- 
mediate necessities  of  life — and  it  will  take 
a  great  part  of  his  crude,  unorganised  labour 
to  produce  even  such  bare  necessities.  But 
in  a  highly  organised,  cultured,  and  skilful 
society,  the  necessities  of  life  will  be  pro- 
duced by  a  tithe  of  the  labour,  leaving  the 
remainder  free  to  produce  capital  goods,  like 
machinery  and  tools.  With  the  growth  of 
culture  and  knowledge,  and  the  perfecting 
of  machinery — as  man  gains  more  and  more 
mastery  over  the  forces  of  nature — -so  the 
community's  production  becomes  more  and 


Production  and  Development         29 

more  economic.  For,  as  we  have  already 
seen,  society's  economic  aim  is  the  produc- 
tion and  distribution  of  commodities 
required,  by  the  minimum  amount  of  effort 
and  the  least  possible  waste. 

We  see,  then,  that  there  are  two  classes 
of  commodities  produced,  viz.,  ultimate 
consumable  commodities  and  capital  goods. 
The  production  of  the  first  class  is  termed 
output;  the  production  of  the  second  class 
is  called  development.  And  we  see  that, 
as  society  becomes  highly  organised,  a 
decreasing  amount  of  its  labour  becomes 
necessary  for  output  (immediate  consumable 
commodities),  and  an  increasing  amount  of 
its  labour  will  be  turned  to  development 
(  capital  goods).  In  fact,  as  society  becomes 
more  cultured,  organised  and  highly  skilled, 
it  will  produce  more  and  more  commodities 
by  less  and  less  human  effort.  Capital 
goods,  in  the  form  of  machinery,  tools,  and 
capitalised  natural  forces  (land,  water,  solar 
energy,  etc.),  will  gradually  take  the  place  of 


30  The  New  Economics 

man-power,  leaving  man  free  to  develop  his 
personal  powers  as  he  sees  fit. 

In  a  highly  organised  state  of  society  the 
process  of  development  will  be  just  as 
necessary  and  important  as  the  process  of 
output,  and  with  the  progress  of  civilisation, 
and  increase  of  population,  more  and  more 
producers  will  be  devoting  their  energies  to 
development,  and  less  and  less  to  output. 

The  end  of  production  is  to  supply  the 
needs  of  the  community.  This  is  the  only 
kind  of  production  which  the  science  of 
Economics  has  to  consider,  and  a  commodity 
is  not  produced,  from  the  view-point  of 
Economics,  until  it  is  brought  to  market, 
that  is,  brought  to  its  potential  consumer. 

We  see,  then,  that  supply  is  the  end  of 
production,  and  that  consumption  will  react 
in  an  important  manner  upon  the  process  of 
production.  We  shall  see  later  that  bring- 
ing goods  to  market  entails  price  fixing, 
which  plays  an  important  part  in  distribution. 


CHAPTER    FOUR 

DEMAND  AND  DISTRIBUTION 

THE  distribution  of  the  economic  wealth 
that  society  has  produced  in  the  form  of 
ultimate  consumable  commodities  depends 
upon  the  effective  demand,  that  is,  purchas- 
ing power  (money,  cheques,  etc.),  brought  to 
market  to  buy  goods.  In  speaking  of  the 
demand  for  goods  in  Economics,  we  must 
bear  in  mind  the  fact  that  the  word 
'"  demand  "  has  two  meanings.  A  starving 
man  feels  a  "  demand  "  for  food ;  but  from 
the  economic  view-point  his  natural  demand 
only  becomes  "  effective  demand  "  when  he 
has  the  money  to  exchange  for  food,  We 
have  seen  in  a  previous  chapter  that  money 
is  the  circulating  and  distributing  medium 
for  the  goods  that  society  has  produced.  It 


32  The  New  Economics 

follows,  therefore,  that  as  society  increases 
her  production  of  goods  she  should  increase 
her  production  of  purchasing  power,  in  order 
to  distribute  these  goods  among  the  com- 
munity. Should  society's  production  of 
goods  be  diminished,  the  amount  of  pur- 
chasing power  should  be  diminished  too,  as 
less  circulating  medium  is  required  the  fewer 
goods  there  are  to  circulate,  and  vice  versa. 
In  fact,  a  certain  ratio  should  be  kept 
between  the  flow  of  goods  into  the  market 
and  the  flow  of  purchasing  power  into  the 
market  if  the  price  of  goods  is  to  be  kept 
stable. 

Under  the  present  economic  system,  prices 
are  fixed  according  to  the  ratio  between 
purchasing  power  and  goods  in  the  market 
at  any  given  time.  Suppose  you  could 
increase  the  number  of  goods  brought  to 
market,  and  simultaneously  keep  the  amount 
of  purchasing  power  in  the  market  fixed,  then 
the  quantity  of  goods  would  be  increased  in 
proportion  to  money — money  consequently 


Demand  and  Distribution  33 

would  become  dearer,  and  the  distribution  of 
the  goods  produced  would  become  difficult. 
If  the  purchasing  power  were  not  increased  in 
ratio,  this  situation  would  mean  a  forced 
reduction  of  prices,  resulting  in  loss  to  those 
who  were  obliged  to  sell  goods  at  less  than  it 
cost  to  produce  them. 

Again,  if  you  greatly  increase  the  amount 
of  purchasing  power  in  circulation,  without 
increasing  the  production  of  goods  in  ratio, 
then  the  amount  of  money  will  have  increased 
in  proportion  to  goods — money  consequently 
becomes  cheaper,  and  the  distribution  of 
goods  produced  again  becomes  difficult.  If 
the  production  of  goods  is  not  increased 
accordingly,  this  situation  will  mean  an 
increase  of'  prices,  resulting  in  loss  to  those 
who  have  received  money  as  a  reward  for 
services,  and  find  that  this  money  will  buy 
little  or  less  than  it  did  when  they  contracted 
for  their  services. 

We  see,  then,  that  the  distribution  of  the 
wealth  society  has  produced  in  the  shape  of 


34  The  New  Economics 

consumable  commodities  depends  upon  the 
effectiye  demand  for  those  commodities  in 
the  market.  We  see  that  "  effective 
demand  "  is  purchasing  power  brought  to 
market  against  goods  brought  to  market,  and 
that  if  distribution  is  to  function  smoothly, 
a  certain  fixed  ratio  must  be  maintained 
between  the  amount  of  purchasing  power  and 
the  quantity  of  goods  brought  to  market  at 
different  periods. 

If  there  is  not  a  fixed  ratio  maintained 
between  the  flow  of  purchasing  power  and 
the  flow  of  goods  to  market,  then  distribu- 
tion is  checked,  because  distribution,  as 
society  is  constructed  at  present,  depends 
upon  effective  demand. 

Obviously,  then,  it  is  no  good  society  pro- 
ducing what  it  cannot  distribute,  or  what 
there  is  no  effective  demand  for.  This 
applies  as  much  to  production  for  foreign 
markets  as  to  distribution  in  the  home 
market.  In  fact,  production  is  checked 
automatically  when  distribution  is  checked. 


Demand  and  Distribution  35 

A  word  may  be  said  here  about  the 
essentially  modern  power  of  advertisement, 
since  it  is  a  force  which  has  a  great  influence 
over  demand  and  distribution.  The  whole 
object  of  advertising  is  to  effect  sales,  and 
it  does  it  by  stimulating  a  demand  for  goods. 
Advertising  and  salesmanship  have  become 
highly  important  factors  in  our  industrial 
organisation. 

Now  it  is  not,  of  course,  in  the  power  of 
the  advertiser  or  salesmen  to  increase  the 
amount  of  purchasing  power  in  circulation, 
but  he  can  influence  the  use  of  it  and  often 
direct  it  into  the  channel  he  desires.  He 
may  create  a  demand  for  commodities  never 
desired  before;  he  may  extend  the  field  of 
demand  for  goods  already  desired,  and 
induce  people  to  expend  their  purchasing 
power  in  a  way  that  is  new  to  them.  By 
these  means  he  often  gives  a  direction  to 
the  community's  effective  demand,  and  con- 
sequently influences  production  which  always 
attempts  to  supply  an  existing  demand. 


36  The  New  Economics 

We  see,  then,  the  important  part  that 
effective  demand  plays  in  production,  and 
how  prices  control  effective  demand;  so  the 
fixing  of  prices  may  control  production, 
demand,  and  distribution. 

We  see  also  that  it  is  no  use  society  pro- 
ducing, either  what  it  does  not  need,  or  what 
it  cannot  distribute.  To  do  so  is  to  waste 
its  resources  and  energies,  which  is 
uneconomic. 

To  recapitulate,  there  are  two  kinds  of 
"  demand  " — natural  and  effective.  Effec- 
tive demand  depends  upon  purchasing 
power. 

Under  our  present  economic  system, 
prices  are  fixed  according  to  the  ratio 
between  purchasing  power  and  consumable 
commodities,  brought  to  market  at  any  given 
time. 

Steady  distribution  depends  upon  the 
uniformity  of  flow  between  goods  and  pur- 
chasing power  brought  to  market  at  any 
given  time. 


Demand  and  Distribution  37 

If  distribution  is  checked,  production  is 
checked. 

For  society  to  produce  what  it  does  not 
need,  or  cannot  distribute,  is  uneconomic. 


CHAPTER    FIVE 

WORK  AND  WAGES 

WORK  is  a  necessary  function  of  man  and 
society.  Its  necessity  lies  in  the  need  for 
the  production  of  commodities  whereby 
society  is  enabled  to  exist.  That  great 
section  of  the  community  which  works  at 
various  functions  aiding  in  the  progress  of 
development  and  output  does  so  from  the 
economic  necessity  of  existence.  The 
amount  of  such  work  which  is  done  for 
pleasure  is  negligible,  and  can  be  'safely 
disregarded.  The  pleasure  that  the  worker 
may  obtain  from  his  work,  though  important 
philosophically,  does  not  enter  into  the 
sphere  of  economics,  except  as  such  pleasure 
may  affect  the  productive  powers  of  the 
worker.  Considering  the  matter  purely  from 
the  economic  view-point,  we  can  say  that 


Work  and  Wages  39 

society  works  because  it  must,  and  not 
because  of  the  enjoyment  that  comes  from 
work.  Work  is  a  means  to  an  end,  and  not 
an  end  in  itself.  The  end  of  work  is 
production. 

In  a  primitive  state  of  society  the  com- 
munity will  produce  very  little  more  than 
it  consumes.  Very  few  commodities  will  be 
accumulated,  and  consequently  there  will  be 
little  leisure  among  the  members  of  that 
society  for  any  cultivation  of  the  arts  and 
sciences.  The  progress  of  civilisation,  con- 
sidered economically,  is  an  ever-increasing 
capacity  to  produce  more  than  is  consumed. 

Wealth  can  only  be  accumulated  in  ratio 
to  the  increase  of  production  over  consump- 
tion, and  it  is  only  the  accumulation  of  such 
wealth  which  can  obtain,  for  a  section  of  the 
community,  the  leisure  necessary  for  a 
cultivation  of  the  arts  and  sciences. 

The  progress  of  science  and  the  arts, 
considered  economically,  is  one  of  constantly 
increasing  means  of  production  by  a  con- 


40  The  New  Economics 

stantly  decreasing  amount  of  human  effort. 
Machine  work  more  and  more  takes  the 
place  of  man  work,  and  produces  constantly 
more  and  more.  This  will  mean  that  the 
bare  necessities  of  life  can  be  produced  by 
very  little  human  labour,  and  in  a  very 
short  space  of  time.  Consequently  more 
and  more  men  can  be  put  on  to  producing 
economic  tools,  such  as  machines,  etc.,  and 
it  will  take  a  constantly  decreasing  amount 
of  man  labour  to  produce  the  consumable 
commodities  necessary  to  support  them  whilst 
they  are  engaged  on  such  work. 

The  economic  progress  of  mankind,  there- 
fore, is  one  of  increased  productive  capacity, 
with  a  diminishing  amount  of  human  effort, 
and  consequently  the  possibility  of  increased 
leisure  amongst  members  of  the  community. 

Wages  are  drawn  from  the  product  of 
the  society,  and  are  paid  to  the  labourer  in 
recognition  of  the  share  he  has  taken  in 
production,  either  output  or  development. 

In  a  highly  organised  state  of  society,  as 


Work  and  Wages  41 

we  have  seen,  the  greater  part  of  labour 
will  be  engaged  in  development  and  the 
production  of  capital  goods  rather  than  in 
output,  or  the  production  of  immediately 
consumable  commodities.  If  we  are  to  enjoy 
a  high  standard  of  living  and  of  material 
comfort,  the  work  of  development  will  be  as 
necessary  as  the  work  given  to  output.  It 
will  be  necessary  to  build  ships,  make  roads, 
and  construct  machinery,  as  well  as  to  produce 
meat,  bread,  and  vegetables. 

Here  we  come  to  the  question  of  necessities 
and  luxuries,  and  to  what  extent  productive 
capacity  is  to  be  extended  to  the  latter.  It  is. 
a  question  that  every  separate  society  must 
decide  for  itself.  The  luxuries  of  a  primitive 
age  become  the  sheer  necessities  of  a  more 
civilised  era.  Suffice  it  to  say  that  when  you 
have  passed  the  bounds  of  decent  necessities 
the  production  of  further  commodities 
(luxuries)  can  only  be  obtained  at  the  cost  of 
society's  productive  power  and  leisure.  It 
may  be  pointed  out  that  if  a  society  with- 


42  The  New  Economics 

draws  a  great  deal  of  its  labour  for  the 
production  of  luxuries,  and  diminishes  too 
much  that  part  of  its  labour  engaged  in 
production  of  necessities,  the  market  will  be 
over-stocked  with  luxuries,  and  under-stocked 
with  necessities  to  the  loss  of  all  who  bring 
purchasing  power  to  market.  Necessities — 
immediate  consumable  commodities — will  rise 
in  price,  and  the  first  to  suffer  will  be  those 
possessing  the  least  purchasing  power. 

Wages  are  drawn  from  the  wealth  ensuing 
from  the  exercise  of  society's  productive 
powers.  It  follows,  therefore,  that  as 
society's  capacity  to  produce  increases,  so 
society's  capacity  to  distribute  wages 
increases,  and  vice  versa. 

There  is  no  doubt  that  as  machine  power 
increases,  gradually  eliminating  the  need  for 
manual  labour,  a  new  conception  of  work  and 
wages  will  have  to  be  arrived  at. 

Society  will  be  able  to  produce  more  and 
more  commodities,  with  less  and  less  demand 
for  labour.  The  necessity  to  distribute  the 


Work  and  Wages  43 

commodities  that  society  produces  is  vital; 
otherwise,  as  we  have  shown,  when  distribu- 
tion is  checked,  production  is  checked.  In 
order  to  distribute  the  commodities  it 
produces,  society  will  have  to  replace  the 
wage  by  the  dividend. 

Whether  a  man  can  "  get  employment  "  or 
not,  he  must  have  a  living.  If  a  machine 
can  produce  thousands  of  bottles  a  day,  and 
no  labour  is  needed  to  tend  that  machine, 
society  is  the  wealthier  by  so  many  bottles  a 
day.  So  far  from  any  section  of  the  com- 
munity being  penalised  by  the  introduction  of 
labour-saving  machinery,  the  community  as  a 
whole  should  have  a  share  of  the  increased 
wealth  of  society. 

Only  in  a  just  apportioning  of  society's 
wealth  among  its  members  can  the  machinery 
of  distribution  be  made  to  function  smoothly, 
and  only  when  the  machinery  of  distribu- 
tion functions  smoothly  will  the  machinery 
of  production  operate  economically  and 
successfully. 


CHAPTER  SIX 

CREDIT   AND    BANKING 

CREDIT  is  based  on  faith  or  belief,  as  the 

4 

word  "  credo  " — I  believe — signifies.  The 
credit  of  an  individual  or  a  nation  is  good  if 
their  promise  to  carry  out  the  requirements 
of  their  creditor  is  believed.  Their  credit 
will  be  bad  if  such  promise  is  disbelieved. 
Two  factors  enter  into  the  consideration  of 
any  promise  to  pay,  viz.,  willingness  and 
ability.  From  the  economic  point  of  view, 
ability  is  the  more  important  element,  since, 
in  an  organised  and  civilised  community,  pay- 
ment of  just  debts  can  be  enforced  where 
the  ability  to  pay  is  present,  but  cannot 
be  enforced  where  the  ability  is  absent, 
however  much  willingness  to  pay  may  exist. 
Where  a  country's  ability  and  willingness 
to  produce  commodities  is  high,  her  credit 


Credit  and  Banking  45 

among  her  neighbours  will  be  high,  and  vice 
versa. 

Real  credit,  then,  is  based  on  a  country's 
capacity  to  produce  economic  wealth,  that 
is,  tangible,  concrete  commodities.  Anything 
which  enhances  this  capacity  enhances  her 
credit;  anything  which  diminishes  this 
capacity  diminishes  her  credit. 

Financial  credit  is  the  reflection  of  real 
credit.  Just  as  money-wealth  is  backed  by 
the  wealth  of  real  tangible  goods,  so  a 
country's  credit  rests  on  her  capacity  to  pro- 
duce goods,  and  will  be  great  or  small, 
according  to  that  ability.  If  there  were  a 
universal  gold  currency,  there  would  be  a 
constant  tendency  for  this  gold  to  flow  into 
the  country  whose  capacity  to  produce  goods 
was  greatest.  Financial  credit  follows  real 
credit. 

Financial  credit  is  controlled,  at  present, 
by  the  banking  business,  and  it  is  obvious 
that  the  present-day  financial  system  which 
gives  the  control  of  credit  to  the  banking 


46  The  New  Economics 

corporations  gives  them  also  an  immense 
economic  power.  It  gives  them  the  power 
of  issuing  credit  where  and  when  they  please, 
and,  incidentally,  of  price-fixing. 

Bearing  in  mind  that  financial  credit  must 
reflect  real  credit,  and  that  purchasing  power 
must  increase  in  the  same  ratio  as  capacity 
to  produce  consumable  products,  it  will  be 
our  task  to  examine  whether  the  present 
system  of  credit  issue  fulfils  its  function, 
and  if  not,  where  precisely  it  fails.  In  the 
process,  it  will  be  seen  that  although  bank- 
ing in  England  has  grown  and  expanded  side 
by  side  with  the  factory  system,  it  has  made 
no  attempt  to  adapt  itself  to  the  conditions 
peculiar  to  large-scale  production ;  it  has 
chosen  rather  to  keep  a  tight  rein  over 
credit-issue  than  to  serve  those  economic 
laws  which  alone  can  keep  a  society  healthy 
and  progressive.  In  its  attachment  to  the 
gold  basis,  which  forces  it  to  restrict  or 
expand  credit  without  considering  the  needs 
of  industry  or  of  the  community,  it  bears 


Credit  and  Banking  47 

the  marks  of  its  primitive  origin.  Banking 
originated  in  usury. 

The  principle  of  banking  dates  from  Roman 
times ;  that  is  to  say,  the  Roman  "  banks  " 
accepted  money  from  their  clients  in  return 
for  a  "  credit "  against  which  cheques  might 
be  drawn  very  much  as  they  are  to-day.  In 
England,  banking  began  in  the  seventeenth 
century  with  the  rise  of  the  goldsmith 
bankers.  Merchants  lodged  their  money  with 
the  goldsmiths  for  purposes  of  safety,  and 
the  money-lenders  became,  with  great  profit 
to  themselves ;  money-borrowers.  "  Gold- 
smith bankers  paid  ten  or  twelve  per  cent 
on  deposit,  and  used  the  cash  as  the  basis  of 
loans  at  twenty  or  thirty  per  cent."  (Powell, 
"  Evolution  of  the  Money  Market.") 

There  are  still  people  under  the  illusion 
that  the  money  lent  by  banks  does  not 
exceed  the  amount  they  have  previously 
borrowed.  "  Deposit  "  is  a  misleading  term, 
for  though  money  in  small  quantities  is  cer- 
tainly deposited  with  bankers,  the  major  part 


48  The  New  Economics 

of  the  "  deposits "  shown  in  the  bankers' 
balance  sheet  are  a  liability  created  contem- 
poraneously with  the  loan  they  offset ;  having 
created  a  loan,  they  will  show  it  on  the  credit 
side  of  their  ledgers  as  an  "  asset,"  and  on 
the  debit  side  as  a  liability  ("  deposit  ").  It 
is  important  to  realise  that  this  loan  is  not, 
and  could  not  possibly  be,  issued  against 
cash  in  the  banker's  tills,  but  is  issued  against 
the  real  credit  of  the  community,  the  power 
of  the  community  to  produce  goods  to  the 
money  value  of  the  loan.  A  loan  or  advance 
is  a  creation  by  a  private  bank  of  a  debt 
against  the  community;  in  effect,  some 
section  of  the  community  are  set  to  work  to 
manufacture  a  particular  class  of  commodities, 
and  the  debt  cannot  be  cancelled  until  these 
goods  are  sold.  Deposit  banks,  in  the  strict 
sense  of  the  terms — that  is,  banks  which  are 
limited  to  re-issue  only  the  amount  of  the 
moneys  deposited  with  them — hay.e  never 
existed  in  this  country,  and  in  other  countries 
only  for  short  periods,  and  for  a  specific  pur- 


Credit  and  Banking  49 

pose  unconnected  with  the  growth  of  trade ; 
perhaps,  in  the  strict  sense  of  the  term,  they 
are  not  banks  at  all. 

Banking  in  its  earlier  stages  was  based 
on  the  discovery  that  it  is  possible  to  create 
loans  to  several  times  the  amount  of  the 
moneys  actually  lodged ;  the  number  of  loans 
that  a  banker  could  make  being  limited  only 
by  his  obligation  to  repay  his  depositors  their 
cash  on  demand,  and  in  normal  times  such 
demands  were  seldom  made. 

This  raising  of  loans  on  a  cash  basis  may  be 
compared  to  a  kind  of  Box  and  Cox  board- 
ing-house arrangement.  Suppose  a  landlady 
who  has  only  the  one  room  to  let,  finds  four 
boarders  each  wanting  the  room  for  six  hours 
at  different  times  of  the  day ;  she  can  let  her 
room  four  times  over,  and  charge  rent  for  one 
room  four  times.  This  arrangement  might 
work  satisfactorily  without  any  of  the  boarders 
being  aware  of  the  trick  played  on  them,  until 
a  time  came  when  all  four  wanted  the  room 
at  once,  and  it  was  discovered  that  the  land- 


50  The  New  Economics 

lady  was  charging  full  rent  for  the  room  four 
times  over.  This  homely  illustration  may 
serve  to  show  how  cash  is  related  to  loan 
credit,  the  cash  reserve  corresponding  to  the 
one  room,  and  the  loans  or  credit-issues  to 
the  landlady's  lettings  of  the  room. 

Of  course,  this  corresponds  only  to  the 
actual  cash  basis  or  gold  basis  on  which 
modern  banking  has  been  reared.  If  banks 
are  permitted  to  issue  notes  or  cheques, 
there  is,  of  course,  no  limit  to  the  inflation 
of  the  currency  which  may  ensue.  Prior  to 
the  rise  of  the  big  joint-stock  banks.  Eng- 
lish banks  relied  for  the  creation  of  their 
loans  and  deposits  mainly  on  issues  of  notes 
which  were  made  legal  tender  for  payment  of 
debts ;  and  being  based,  as  we  have  shown, 
on  the  credit  of  the  community,  the  belief 
in  society's  ability  to  produce  goods  to  the 
value  of  the  notes  issued,  the  notes  could  be 
accepted  as  willingly  as  legal  tender,  and, 
when  brought  to  market,  serve  all  the  pur- 
poses of  money.  The  goldsmith  bankers  and 


Credit  and  Banking  51 

the  various  London  and  country  banks  were 
note-issuing  banks.  The  Bank  of  England 
was  established  (1694)  as  a  note-issuing  bank, 
loaning  its  subscribed  capital  to  the  Govern- 
ment, and  receiving  in  return  the  legal  right 
to  create  note-credit  to  the  amount  of  the 
debt.  But  note-issuing  ceased  to  be  an  all- 
important  element  in  banking  with  the  rise 
of  the  joint-stock  banks,  which  developed  the 
system  of  cheque  currency  with  which  we  are 
familiar  to-day.  The  bank  of  England  is 
now  mainly  the  bankers'  bank.  Note-issue 
is  now  a  subsidiary  function,  its  main  function 
being  that  of  creditor  to  the  big  banking  com- 
panies who  have  credits  in  its  books,  and 
unite  with  it  to  form  a  complete  private  bank- 
ing monopoly,  having  absolute  control  over 
all  forms  of  credit-issue. 

The  joint-stock  banks,  instead  of  issuing 
notes  against  the  bullion  in  their  vaults  and 
against  securities,  manufacture  credit  in  their 
books.  The  quantity  and  class  of  goods  to 
be  produced,  and  their  distribution  when  com- 


52  The  New  Economics 

pleted,  the  community  as  a  whole  has  no 
power  of  deciding ;  in  this,  as  in  all  other 
matters,  it  is  completely  in  the  hands  of  the 
banking  interests.  The  results  of  this  on 
the  two  prime  needs  of  production  and  dis- 
tribution well  be  discussed  later. 


CHAPTER  SEVEN 

A  STANDARD  OF  VALUE 

CREDIT  is  the  life-blood  of  society,  and  our 
banking  monopolists  are  in  the  unique  position 
of  being  able  to  retard  or  accelerate  the  heart's 
action  at  will.  Their  power  is  derived  mainly 
from  the  illusion  of  the  "  cash  basis  "  of 
credit. 

This  illusion,  that  a  "  sound "  currency 
must  be  "  fixed  firmly  on  a  cash  basis," 
was  fostered  by  the  Bank  Charter  Act  of 
1844,  which,  beyond  £14  millions  against 
securities,  regulated  the  amount  of  note- 
issue  by  the  quantity  of  gold  in  the  bank 
vaults. 

Why  credit  should  be  artificially  limited 
by  the  amount  we  happen  to  possess  of  some 
particular,  not  very  useful,  metal,  without 


54  The  New  Economics 

relevance  to  the  needs  of  industry,  was  not 
considered  by  those  who  framed  the  Act; 
it  can  only  be  explained  as  as  an  enactment 
of  one  of  those  solemn  farces  that  make 
actual  history  so  much  funnier  than  the 
imaginary  one  of  A' Beckett. 

The  Act  was,  of  course,  evaded  or  avoided 
(as  Gilbart,  I  think,  points  out),  because 
borrowers  did  not,  as  a  rule,  ask  the  bank 
for  notes,  but  for  a  credit  in  its  books. 
*  There  is  an  increase  in  securities  on  one 
side  of  its  balance  sheets;  an  increase  in 
deposits  on  the  other.  ...  All  that  has 
happened  is  that  the  Bank  of  England  has 
lent  *  money  '  to  some  more  borrowers,  and, 
being  banker  to  the  other  banks,  has  been 
able  to  do  so  by  making  a  book  entry,  in- 
stead of  money  being  taken  away  in  coin  or 
notes." 

Note-issuing,  as  was  pointed  out  in  our 
previous  chapter,  had  ceased  to  be  the  most 
important  part  of  banking  by  the  discovery 
of  cheque  currency. 


A  Standard  of  Value  55 

Gold  currency  ceased  in  1914  with  the 
issue  of  incontrovertible  Treasury  notes ;  but 
the  gold  fetish  remains,  as  Major  Douglas 
points  out,  in  an  unregulated  paper  currency. 
Not  that  the  banking  interests  have  ceased 
to  throw  hints  of  a  return  to  "  sound  currency  " 
as  they  call  it!  Gold  is  their  monopoly  and 
raison  d'etre.  And  the  cash  basis  of  credit, 
if  it  has  no  real  existence,  has  at  least  a  firm 
foundation  in  the  popular  mind.  It  is  an 
easy  task  to  instil  into  the  mind  of  plain 
John  Citizen,  devoid  of  any  knowledge  of 
the  principles  of  economics  and  the  methods 
of  high  finance  (so  close  a  friend  to  high 
prices  and  high  taxation),  that  all  his  troubles 
are  due  to  "  inflation,"  "  depreciation  "  and 
"  Government  borrowing,"  and  it  would  not 
be  difficult  (with  the  help  of  the  Press)  to 
set  him  clamouring  for  a  return  to  "  sound 
currency,"  as  he  is,  at  the  moment  of  writ- 
ing, clamouring  for  a  decrease  of  purchasing 
power. 

John  Citizen  will  associate  high  prices  with 


56  The  New  Economics 

a  paper  currency  because  they  are  coinci- 
dent, and  will  not  inquire  more  deeply  into 
hidden  causes.  The  fact  that  all  his 
troubles  are  due,  not  to  a  paper  currency 
any  more  than  to  a  gold  currency,  but  to 
an  unregulated  currency,  is  not  likely  to 
be  hinted  at. 

It  suits  those  who  have  a  monopoly  of  its 
issue  to  treat  the  abstract  idea  of  money  as 
if  it  were  a  loanable  commodity.  And  it  is 
not  only  the  plain  man  that  has  been  found 
willing  to  acquiesce.  Mill  has  this  illumi- 
nating definition  of  money,  "  The  introduc- 
tion of  money  does  not  interfere  with  the 
operation  of  any  of  the  laws  of  value.  .  .  . 
The  reasons  which  make  the  temporary  or 
market  value  of  things  depend  on  the  demand 
and  supply,  and  their  average  and  permanent 
values  upon  their  cost  of  production,  are  as 
applicable  to  a  money  system  as  to  a  system 
of  barter.  Things  which  by  barter  would 
exchange  for  one  another  will,  if  sold  for 
money,  sell  for  an  equal  amount  of  it,  and 


A  Standard  of  Value  57 

so  will  exchange  for  one  another  still,  though 
the  process  of  exchanging  them  will  consist 
of  two  operations  instead  of  one.  The  rela- 
tions of  commodities  to  one  another  remain 
unaltered  by  money;  the  only  new  relation 
introduced  is  their  relation  to  money  itself — 
how  much,  or  how  little,  money  they  will  ex- 
change for ;  in  other  words,  how  the  exchange 
value  of  money  itself  is  regulated." 

Then  the  light  deserts  him,  and  he  con- 
tinues :  "  And  this  is  not  a  question  of 
any  difficulty  when  the  illusion  is  dispelled 
which  caused  money  to  be  looked  upon  as  a 
peculiar  thing,  not  governed  by  the  same  laws 
as  other  things.  Money  is  a  commodity,  and 
its  value  is  determined  like  that  of  other  com- 
modities, temporarily  by  demand  and  supply ; 
permanently  and  on  the  average,  by  cost  of 
production." 

From  this  confusion  comments  C.  B. 
Phipson,  "  Mill  was  never  able  to  free  him- 
self, and  it  has  left  inextricably  entangled 
subsequent  reasoning  upon  the  three  impor- 


58  The  New  Economics 

tant  subjects  of  money,  currency  and  price. 
The  idea  of  money  has  been  so  long  and 
intimately  associated  in  civilised  countries 
with  the  form  under  which  it  has  most  com- 
monly presented  itself,  viz.,  with  certain 
definite  quantities  of  gold  and  silver  issued 
by  the  ruling  authorities  in  the  shape  of 
coins,  and  bearing  their  image  and  super- 
scription, that  not  alone  in  the  minds  of  the 
people,  but  in  those  of  thoughtful  reasoners, 
like  Mill  and  other  political  economists,  this 
association  has  been  so  powerful  as  to  have 
resulted  in  a  complete  deception." 

A  circulating  medium,  in  whatever  form, 
is  only  a  means  of  facilitating  exchange  of 
goods.  It  is  well  to  remind  ourselves,  when 
studying  the  complicated  processes  of  modern 
finance,  that  the  science  of  social  economics 
is  concerned  with  one  problem,  and  one 
problem  only.  It  is  the  business  of  society, 
in  its  economic  aspect,  to  "  deliver  the  goods," 
with  the  least  possible  friction  and  waste  of 
energy. 


A  Standard  of  Value  59 

Production  and  distribution — these  are  the 
two  sides  to  what  is  in  reality  this  one  pro- 
cess. We  have  succeeded  only  in  evolving 
a  machinery  incapable  of  distributing 
effectively  the  goods  it  produces,  and  it  is 
with  this  neglected  factor  of  distribution  that 
economics  must  concern  itself. 

It  was  with  this  problem  in  mind  that  in 
some  primitive  society  was  introduced  the 
division  of  labour,  and  the  consequent  barter 
and  exchange  of  one  commodity  for  another. 
Money  facilitates  the  exchange,  but  the 
exchange  value  of  any  particular  class  of 
commodity  must  be  reckoned  in  terms 
of  some  other  commodity.  Price  merely 
equates  these  values.  If  I  sell  a  quarter  of 
wheat  for  two  pounds,  and  I  can  buy  a 
pair  of  boots  for  one  pound,  then  the 
value  of  the  wheat  to  me  is  two  pairs,  of 
boots;  the  two  pounds  have  no  value  in 
themselves,  and  the  transaction  is  not  com- 
plete until  the  tokens  I  have  obtained  from 
the  sale  of  the  wheat  have  been  translated 


60  The  New  Economics 

into  whatever  may  be  my  immediate  or 
ultimate  need. 

Money  is  not  an  intrinsic  standard  of 
value.  To  speak  of  gold  as  a  "  sound 
currency "  because  it  provides  a  "  fixed 
standard  of  value  "  is  to  speak  in  terms  that 
have  lost  the  meaning  men  have  assigned  to 
them. 

We  could  speak  of  a  fixed  standard  of 
value  only  if  the  standard  remained  constant 
when  compared  with  every  other  class  of 
commodity;  but  this  is  clearly  impossible 
when  the  exchange  values  of  all  commodities, 
including  gold,  are  constantly  fluctuating. 
If  I  save  my  two  pounds,  I  may  find,  to  my 
chagrin,  that  at  some  future  time  it  will  buy 
me  only  one  pair  of  boots,  and  this  would  be 
true  whether  the  -pounds  were  paper  or  gold. 
Value  is  comparative. 

As  the  velocity  of  an  object  has  meaning 
only  in  comparison  with  the  velocity  of  some 
other  object  with  which  it  is  compared,  so 
the  value  of  a  commodity  for  purposes  of 


A  Standard  of  Value  61 

exchange,  though  expressed  for  convenience 
in  monetary  units,  must  be  reckoned  finally 
in  terms  of  some  other  commodity. 

The  gold  basis  on  which  modern  banking 
is  reared  has  been  the  point  of  attack  of  a 
number  of  economists,  from  Proudhon  to 
Kitson.  Financial  credit  is  issued  against 
the  real  credit  of  the  nation,  its  ability  to 
produce,  and  could  not  possibly  be  backed 
by  gold  in  the  bank  vaults  (before  the  war 
the  amount  of  unsecured  paper  issue  was 
about  twenty  thousand  millions  sterling, 
against  some  sixty  or  seventy  million  pounds' 
worth  of  bullion).  Yet  the  issue  of  credit 
was  regulated  carefully  and  with  due  regard 
to  the  quantity  of  gold.  A  drain  on  these 
reserves,  either  for  currency  within  the 
country,  consequent  upon  an  expansion  of 
credit,  or  because  of  an  export  of  bullion, 
was  duly  followed  by  a  contraction  of  credit, 
generally  by  raising  the  bank  rate  on  advances 
and  bills  for  discount. 

Whenever  this  occurred,  firms  of  whole- 


62  The  New  Economics 

sale  and  retail  trade  would  be  found  with 
large  stocks  of  goods  on  their  hands,  and 
faced  with  a  falling  market,  and  if  the  credit 
stringency  were  very  acute  such  firms  might 
become  bankrupt.  The  bankruptcy  of  a 
large  firm  would  cause  a  panic ;  banks  would 
call  in  their  loans,  and  the  city  would  enjoy 
one  of  those  periodical  crises  which  form  its 
principal  contribution  to  history. 

The  banking  corporations  have  never,  it 
must  be  confessed,  concerned  themselves 
very  much  about  the  needs  of  industry,  but 
we  must  set  it  to  their  credit,  or  otherwise, 
that  they  have  always  shown  great  concern 
about  this  metal  of  our  superstition.  It  is 
guarded  closely,  lest  anyone  should  wish  to 
run  away  with  it. 

We  cannot  but  admit  that,  in  theory,  it 
works  very  well.  We  have  an  expansion  of 
credit,  and  prices  rise;  there  is  a  drain  on 
the  banks'  supply  of  cash  for  currency  cir- 
culation ;  and,  the  high  prices  attracting 
foreign  exporters,  imports  increase,  whilst 


A  Standard  of  Value  63 

exports  diminish,  with  the  result  that  there 
is  a  still  further  drain  of  gold  abroad  to  meet 
the  excess  of  imports  over  exports,  and  the 
cash  reserve  is  further  depleted.  The  bank 
rate  is  raised  and  credit  restricted,  with  the 
interesting  results  we  have  seen. 

But  we  need  not  despair ;  we  have 
entrusted  our  lives  to  high  finance,  and  high 
finance  will  not  betray  us.  At  a  certain  point 
in  the  interesting  drama — which  we  may 
designate  starvation-point  or  specie-point — 
the  good  fairy  will  whisper  to  foreign  specu- 
lators the  attractions  offered  by  our  high 
bank  rate,  and  gold  will  return  to  us. 

Meanwhile,  credit  having  been  contracted 
and  prices  lowered,  this  country  has  become 
a  poor  market  for  imports,  but  exports  have 
been  accelerated;  so  in  exchange  for  our 
excess  of  exports  over  imports  more  gold 
returns  to  us.  The  main  thing,  as  you  will 
see,  is  that  the  gold  returns  to  us!  And  if 
we  cannot  promise  a  happy  ending,  at  least 
we  can  have  the  play  all  over  again. 


64  The  New  Economics 

This  is  the  true  history  of  the  gold  basis, 
so  beloved  of  modern  economists,  with  a  few 
notable  exceptions;  they  have,  in  general, 
been  so  concerned  with  the  means  as  to  lose 
sight  of  the  end.  They  have  become 
wrapped  up  in  the  medium,  and  forgotten  the 
spirit.  Only  thus  can  be  explained  their 
fidelity  to  the  idol  they  have  manufactured 
out  of  beaten  gold,  and  to  which  they  offer  up 
their  prayers  periodically  in  book  form.  A 
standard  of  value,  declare  these  midget 
philosophers,  must  be  something  that  is  rare 
(like  gold),  but  not  too  rare  (like  radium). 
Well,  we  suggest  a  little  common  sense% 
albeit  with  little  hope  that  it  will  be  adopted. 


CHAPTER  EIGHT 

FOREIGN    EXCHANGE 

IT  is  a  common  error  to  argue  that  if  we 
"  stabilise  the  exchanges "  our  internal 
problems  will  solve  themselves.  A  nation 
which  lives  for  export  will  attach  a  false  value 
to  its  exchange  rates  with  other  countries. 

'  The  root  of  the  fallacy  (that  a  balance 
of  exports  over  imports  is  a  favourable 
balance)  lies  in  the  idea  that  the  main  object 
of  our  industries  is  to  make  goods  for  export, 
that  we  live  by  foreign  trade,  and  that  our 
foreign  trade  is  more  important  than  our 
production  for  home  consumption.  The 
prime  object  of  a  nation's  industry  is  to  feed, 
clothe  and  house  her  own  population,  who 
are  the,  chief  producers  of  all  her  manufac- 
tures, and  are  entitled  to  consume  the  major 

£ 


66  The  New  Economics 

part  of  them.  The  nation's  exports  are  only 
its  surplus,  which  it  exchanges  for  those 
foreign  products  which  it  cannot  produce 
itself."  (Todd,  "  Mechanism  of  Exchange.") 

Even  the  most  orthodox  of  economists,  we 
imagine,  will  agree  that  this  is  a  desideratum ; 
yet  the  man  in  the  street,  at  least,  is  firmly 
of  the  opinion  that  a  nation's  prosperity  is 
gauged  by  the  extent  of  its  foreign  trade. 
It  has  become  an  idee  fixe,  for  which  he  is 
not  only  willing,  but  eager,  to  barter  his 
liberty,  health,  happiness,  life,  and  anything 
else  he  possesses !  There  are  subjects  on 
which  the  body  social  is  no  longer  sane,  and 
we  must  tread  carefully  if  we  are  to  free  the 
national  mind  from  hallucinations  which 
long  companionship  has  made  so  very  dear 
to  it. 

If  a  nation,  by  a  rational  distribution  of 
purchasing  power  amongst  its  own  popula- 
tion were  able  to  absorb  the  major  part  of 
its  products,  its  foreign  trade,  to  take  the 
example  of  a  manufacturing  country  like 


Foreign  Exchange  67 

England,  would  consist  of  the  exchange  of 
its  surplus  manufactures  for  raw  materials 
and  foodstuffs.  Its  manufactures  could  be 
sold  at  any  price  necessary  to  obtain  these. 
Its  exports  must  ultimately  be  paid  for  by 
either  goods  or  services,  unless  an  inter- 
national coinage,  such  as  gold,  is  used. 
Thus,  in  essence,  the  process  would  be  simply 
export  of  a  country's  surplus  products  and 
the  creation  of  a  credit  in  the  importing 
country,  in  terms  of  its  own  currency,  to  be 
cancelled  when  the  exporting  country 
exchanges  this  credit  for  goods  at  their 
market  value. 

Methods  of  exchange  often  appear  to  be 
designed  to  prevent  rather  than  facilitate 
trade,  and  it  is  essential  that  the  student 
should  disabuse  his  mind  of  the  idea  that 
modern  finance  is  a  sort  of  mystical  world- 
religion,  with  the  exchange  rates  as  its  ritual. 
The  aim  of  an  international  money-trust  will 
be  to  keep  absolute  control  of  all  forms  of 
credit-issue,  and  this  it  will  be  able  to  do 


68  The  New  Economics 

owing  to  its  very  profitable  position  as  a 
buyer  and  seller  of  debts. 
A.  We  have  defined  price  as  the  ratio  of 
exchange.  This,  of  course,  is  true  whether 
the  transaction  takes  place  within  one  credit 
area  or  not ;  that  is  to  say,  the  market  value 
of  an  article  is  its  exchange  value  in  terms  of 
some  other  article ;  and  the  fact  that  they  are 
expressed  in  different  currencies  does  not 
affect  the  question. 

In  the  case  of  small  transactions  within  a 
single  credit  area,  the  debt  may  be  said  to 
be  discharged  when  the  seller  receives  cur- 
rency notes  in  exchange  for  his  goods,  or  the 
buyer  transfers  his  claim  against  the  bank 
for  currency  notes  to  the  account  of  the 
seller.  But  for  larger  transactions,  even 
within  a  single  credit  area,  payment  is  not 
always  forthcoming  immediately.  This  is 
especially  so  in  the  case  of  orders  by  whole- 
sale or  retail  dealers  who  are  not  in  a  position 
to  pay  until  they  have  disposed  of  their  stock. 
In  this  case  the  buyer  will  furnish  what  is  in 


Foreign  Exchange  69 

effect  an  I.O.U.,  either  in  the  form  of  a 
promissory  note,  or  by  accepting  an  order  to 
pay,  or  bill  of  exchange,  drawn  against  him. 

The  bill  of  exchange  may  be  drawn  not 
against  the  buyer,  but  against  some  accepting 
house  of  good  financial  standing  that  is 
willing  to  allow  its  credit  to  be  used,  and 
cheques  and  bank  drafts  are  similarly  bills 
of  exchange  drawn  against  a  bank.  For- 
merly bills  were  discounted  either  by  bill- 
brokers  or  by  branches  of  foreign  banks, 
but  latterly  the  joint-stock  banks  have  entered 
the  market.  The  point  is  immaterial,  since 
the  bill-brokers  work  on  loans  from  the  bank, 
and  are  at  the  mercy  of  the  banking  com- 
panies, who  can  regulate  the  credit  at  the 
disposal  of  the  market,  and  consequently  the 
traffic  in  bills,  by  raising  or  lowering  the  rate 
of  interest  on  advances. 

The  banking  companies  have  now  branches 
or  correspondents  in  every  country,  and 
methods  of  remittance  have  somewhat  altered 
in  recent  times.  The  most  historical  form  of 


70  The  New  Economics 

indebtedness  is  the  bill  of  exchange,  and 
though  other  more  rapid  forms  of  remittance, 
such  as  cable  transfers,  are  now  in  use,  they 
can  hardly  be  said  to  have  superseded  the 
bill  of  exchange,  which  is  the  basis  of  all 
exchange  operations. 

Description  of  the  various  methods  of 
remittance,  therefore,  is  hardly  relevant  to 
our  purpose,  but  in  case  the  reader  is 
unacquainted  with  the  terms  employed  we 
will  briefly  enumerate  them.  These  are 
mainly:  Drafts,  drawn  by  a  bank  on  another 
bank,  including  telegraphic  transfers ;  bills  of 
exchange,  drawn  by  merchants  on  bankers, 
against  a  bank  credit ;  and  the  ordinary  trade 
bill,  or  bill  of  exchange,  drawn  by  the 
exporter  against  the  importer,  and  usually 
discounted  at  a  bank,  that  is,  sold  to  the 
bank.  Bills  may  be  payable  at  sight  or  after 
long  or  short  periods;  this  involves  the 
factor  of  interest,  and  consequently  the  price 
at  which  the  bill  will  be  discounted.  The 
finance  bill,  or  accommodation  bill,  is  a  bill 


Foreign  Exchange  71 

drawn  solely  to  raise  money,  and  does  not 
represent  an  actual  transaction ;  it  is  drawn 
usually  on  some  accepting  house  for  the 
purpose  of  being  sold  to  a  bank.  The 
script  of  international  loans  is  another  form 
of  remittance,  but  mostly  used  by  bankers 
themselves  in  settling  the  balance  of 
indebtedness. 

Sombart  has  an  interesting  note  on  the 
development  by  the  Jews  of  the  principle 
of  negotiability  in  commercial  instruments. 
The  Jewish  law  knows  only  impersonal  debt, 
and  has  no  term  for  personal  obligation,  so 
debts  are  bought  and  sold  in  the  money 
market  very  much  as  the  proletariat  sell  their 
labour  power  at  its  market  value.  The 
merchant  in  all  his  transactions  is  completely 
in  the  power  of  the  international  money-trust, 
which  determines  always  the  price  at  which 
goods  or  debts  shall  be  bought  and  sold. 


CHAPTER   NINE 

RATES  OF  EXCHANGE 

THE  bill  of  exchange,  according  to  Mr 
Hartley  Withers,  "  is  one  of  those  inventions 
that  seem  to  be  good  for  everybody,  and  to 
make  everybody  better  off."  We  are  not  sure 
whether  the  catch  here  is  in  "  seem "  or 
"  everybody  " — that  is,  everybody  in  the 
banking  world,  to  which  the  bill  of  exchange 
has  certainly  been  a  very  safe  and  profitable 
investment. 

The  banking  business,  as  we  have  shown, 
consists  in  the  buying,  selling,  and  creating 
of  debts  at  a  profit.  The  simplest  form  of 
acknowledgment  of  debt  is  the  trade  bill, 
drawn,  let  us  say,  by  an  exporter  in  London 
on  an  importer  in  Paris,  and  sold  by  the 
exporter  to  his  London  bank.  Bills  payable 


Rates  of  Exchange  73 

in  Paris  will  thus  accumulate  in  London  and 
become  a  means  of  remittance  when  mer- 
chants in  London  wish  to  pay  for  goods  they 
have  imported  from  Paris. 

In  actual  practice,  the  London  banks  will 
keep  a  credit  with  their  foreign  corres- 
pondents, and  periodically  remit  bills  to 
maintain  it.  To  the  importer  who  is  seeking 
a  means  of  remittance,  they  will  sell  a  bank 
draft  or  a  telegraphic  transfer  on  the  country 
from  which  he  is  importing;  that  is  to  say, 
they  will  manufacture  a  bill  on  their  foreign 
correspondents.  The  banker's  "  purchases 
of  exchange  build  up  his  foreign  balance, 
and  his  sales  of  exchange  tear  it  down 
again.  He  makes  the  two  balance  or  cancel 
one  another  in  the  long  run,  and  makes  his 
profits  out  of  a  difference  between  his  buying 
and  selling  rates  "  (Whitaker), 

To  cover  his  drawings  on  his  foreign 
correspondent,  the  banker  will  sometimes 
send  "  bills  which  he,  in  his  turn,  has 
purchased  from  various  sellers  on  his  own 


74  The  New  Economics 

market.  In  New  York,  he  may  have  bought 
bills  drawn  on  London  during  the  interval 
between  the  departure  of  one  mail  and 
another,  and  perhaps  on  the  very  mail  day 
the  banker  expects  to  remit  the  bills  to 
London  for  encashment  a  client  is  forced  to 
buy  a  draft  from  him.  The  banker  will  sell 
this  draft,  usually  at  a  fair  profit,  and  it  is 
not  unusual  for  the  customer  to  send  it  to 
London  in  settlement  of  some  debt  or  other 
by  the  same  steamer  which  carries  the  batch 
of  bills  previously  purchased  by  the  banker. 
.  .  .  The  profit  on  such  an  operation  is 
apparent  "  (Spalding). 

Rates  of  exchange  depend  mainly  on  two 
interdependent  factors — the  general  level  of 
prices  of  foreign  trade  commodities  in  the 
different  countries,  and  the  balance  of 
indebtedness  between  them.  There  is,  of 
course,  no  regulation  of  import  and  export 
trade;  a  country  may  be  importing  more 
than  it  is  exporting.  To  judge  of  this,  we 
must  take  into  account  not  only  the  visible 


Rates  of  Exchange  75 

exports  of  merchandise,  but  also  such 
invisible  exports  as  income  from  shipping, 
income  from  investments  abroad,  and 
income  from  banking  and  insurance,  which, 
in  the  case  of  a  country  like  England, 
investing  heavily  abroad,  may  be  as  much  as 
^500  millions,  in  the  year.  ("  Board  of 
Trade  Journal  "  estimate  for  1920.  In  the 
ten  years  prior  to  the  war,  according  to  Sir 
George  Paish's  figures,  our  capital  export 
was  ^1,500  millions,  out  of  a  total  capital 
accumulation  at  home  and  abroad  of  between 
/,2,ooo  and  ,£4,000  millions.) 

Assuming,  however,  an  actual  net  excess 
of  imports,  visible  and  invisible,  over 
exports,  the  country  may  still  peg  its 
exchange  rate  at  par  by  means  of  a  foreign 
loan.  This  was  one  of  the  methods  adopted 
by  this  country  during  the  war  to  prevent 
the  New  York  exchange  from  becoming 
unfavourable.  Loans  act  as  an  export  (of 
securities)  on  the  country  which  borrows, 
the  securities  being  "  articles  of  commerce 


76  The  New  Economics 

which  act  upon  the  exchanges  at  the  time 
of  importation,  and  which,  when  they  come 
to  be  re-exported  (and  not  till  then),  will 
affect  the  exchanges  in  a  contrary  direction  " 
(Goschen). 

If  no  such  loan  is  contracted,  and  the 
country  continues  to  import  more  than  she 
exports,  the  exchange  rates  will  move 
against  her,  varying  with  the  price  the 
banker  or  exchange  dealer  is  charging  for 
the  means  of  remittance,  and  depending 
upon  whether  his  supply  of  credit  is  plenti- 
ful or  scarce.  In  this  respect,  the  price  at 
which  drafts  on  other  countries  are  being 
sold,  or  the  rate  of  exchange,  will  depend 
on  the  amount  of  credit  available  and  the 
amount  of  money  brought  to  market  against 
it. 

It  will  be  clear  that  although  the  price  of 
drafts  can  be  expressed  in  this  way,  as  a 
ratio  of  the  amount  of  money  on  the  market 
to  the  volume  of  drafts  available,  it  is  not  a 
complete  explanation,  since  the  amount  of 


Rates  of  Exchange  77 

credit  available  and  the  amount  of  money  to 
meet  it  are  themselves  dependent  on  other 
factors.  All  that  we  can  really  say  is  that 
if  the  exchange  dealer  finds  money  flowing 
in  freely  he  will  raise  the  price  of  his  drafts 
as  high  as  he  can  without  checking  the 
inflow  of  money. 

Theoretically,  a  banker  with  a  short 
supply  of  credits  on  other  countries  could 
charge  any  price  he  wished.  Actually,  in 
most  cases,  if  he  charged  too  high  a  price 
for  his  drafts,  it  would  pay  the  importer  to 
remit  goods  instead. 

We  have  been  assuming  throughout  that 
we  are  dealing  with  post-war  conditions, 
that  there  is  a  prohibition  on  the  export  of 
bullion,  and  gold  can  no  longer  be  remitted 
in  payment.  Before  the  war,  in  those 
countries,  like  England,  which  laid  no 
restrictions  on  the  free  export  of  bullion,  the 
price  of  foreign  exchange  could  never  rise 
above  the  price  at  which  it  would  pay 
importers  to  remit  gold  in  payment.  The 


78  The  New  Economics 

actual  operations  need  not  here  concern  us. 
The  effect  on  trade  of  this  continual  inflow 
and  outflow  of  gold  we  have  dealt  with  in  a 
previous  chapter. 

For  a  country  to  depreciate  its  currency 
has  the  effect  of  turning  the  exchange  rates 
against  it;  by  this,  we  mean  that  its  cur- 
rency is  worth  less  within  the  country,  and 
therefore  abroad.  If  we  have  clearly  under- 
stood that  price  is  merely  the  ratio  of 
exchange  between  one  class  of  goods  and 
another,  there  will  be  no  mystery  attached 
to  this  statement.  If  we  are  considering 
the  price  to  us  of  some  articles  made  in 
U.S.A.,  we  must  take  into  account  the  rate 
of  exchange.  If,  in  spite  of  the  rate  of 
exchange,  they  are  cheaper  than  they  would 
be  in  our  own  country,  imports  from  U.S.A. 
will  increase  until  the  demand  for  means  of 
remittance  causes  the  price  of  drafts  to  rise, 
and  imports  are  checked. 

We  instance  two  countries  only  for  the 
sake  of  simplicity,  but,  of  course,  an  excess 


Rates  of  Exchange  79 

of  exports  to  one  country  may  be  balanced 
by  an  excess  of  imports  from  another. 

International  finance  has  made  of  the 
world  a  single  exchange  market.  No  con- 
sideration of  economy  will  prevent  a  country 
from  competing  with  another  in  its  own 
markets.  On  the  other  hand,  it  does  not 
follow  that  the  price  of  its  goods  abroad  is 
the  price  ruling  at  home.  Combines  may 
prefer  to  dump  abroad  at  less  than  cost 
rather  than  spoil  the  home  market,  or  lose  the 
export  market.  Again,  it  is  quite  possible 
to  have  two  widely  different  prices  ruling,  a 
low  price  at  home  and  a  high  price  abroad: 
we  will  endeavour  to  make  this  clear  in  a 
later  chapter. 


CHAPTER    TEN 

THE  CONTROL  OF   CREDIT 

THE  Joint  Stock  Banks,  with  the  Bank  of 
England  and  the  Clearing  Houses,  form  a 
complete  private  monopoly  of  credit-issue. 

We  print  below  a  combined  balance  sheet 
of  the  Joint  Stock  Banks,  exclusive  of  the 
central  Bank  of  England,  compiled  by  the 
"  Statist." 

LIABILITIES. 

1913          1920 

£  mil.  £  mil. 

Capital  paid  up 71*2  92*8 

Reserve  Funds 46*6  71*3 

Notes  in  Circulation       .        .        .        .  i6'o  54*3 

Acceptances 63*5  H2'5 

Deposit  and  Current  Accounts      .         .  1,0707  2,549*3 

Profit  Balance 6*1  8*9 


Total  ......    1,274*0       2,889-1 


The  Control  of  Credit  81 


ASSETS. 

1913  1920 

£  mil.  £  mil, 

Cash  in  Hand  and  at  Bank  of  England      152*3  44°'7 

Money  at  Call  and  Short  Notice          .       145'°"  J53'i 

Investments 210*9  552'7 

Bills  discounted       .        .        .        .        .       168*4  4*5*9 

Advances 505*8  i,i82'8 

Liabilities  of  Customers  for  Acceptances        63*5  112*5 

Bank  Premises,  etc 27*5  31*4 


Total i,274;o       2,889*^ 

We  cannot  look  for  the  basis  of  this 
gigantic  super-structure  of  credit  in  less 
than  one  £  100  millions  of  paid-up  capital. 
Indeed,  McLeod,  speaking  of  the  rise 
of  the  Joint  Stock  Banks,  pointed  out 
that  at  least  half  of  the  "  paid-up  capital  " 
was  "  nothing  more  than  the  bank's  own 
credit  turned  into  capital.  If  a  bank  wishes 
to  increase  its  capital  and  its  customers  wish 
to  subscribe,  they  may  give  the  banks  a 
cheque  on  their  account — exactly  the  same 
as  paying  the  bank  in  its  own  notes.  It  is 
the  release  of  a  debt  and  that  debt  released 
becomes  an  increase  of  capital.  This  is  the 

F 


82  The  New  Economics 

way  in  which  the  capital  of  all  Joint  Stock 
Banks  is  increased." 

The  term  "  Deposits,"  as  we  have  already 
said,  is  misleading,  since  they  do  not  and 
could  not  represent  an  actual  deposit  of 
money,  but  mean  merely  a  right  to  demand 
money.  Where,  then,  is  this  "  money  "  ? 
We  turn  to  the  assets  side  of  the  balance 
sheet,  and  find  that,  except  for  two  items, 
viz.,  "  cash  in  hand  and  at  the  Bank  of 
England  "  and  "  bank  premises,"  the  assets 
consist  of  the  liabilities  of  those  who  have 
received  the  loans. 

But  even  the  comparatively  small  item, 
"  cash  in  hand  and  at  Bank  of  England  JJ 
does  not  for  the  most  part  represent  actual 
"  cash  "  but  a  credit  created  at  the  Bank  of 
England.  So  there  remains  only  the 
currency  notes  in  the  bank  tills  to  meet  the 
demands  of  industry. 

We  cannot,  however,  regard  treasury 
notes  as  cash  deposits,  since  they  are  not  in 
the  first  instance  deposited  with  the  banks 


The  Control  of  Credit  83 

by  the  public,  but  only  reach  the  public 
through  the  banks  in  response  to  the  banks' 
report  to  the  Treasury  through  the  Bank  of 
England  of  their  needs  in  respect  of  this 
small  change  of  credit. 

In  actual  fact,  large  payments  are  made 
by  cheque,  and  as  Mr  Hartley  Withers  very 
happily  expresses  it,  "  the  loans  of  one  bank 
make  the  deposits  of  another,  and  its 
deposits  consist  largely  of  other  banks'  loans. 
Banking  credits  provided  by  the  banks  for 
one  set  of  customers  in  the  shape  of  loans 
and  discounts,  come  back  to  it  from  another 
in  the  shape  of  deposits  created  by  the  loans 
and  discounts.  A  bank  on  a  small  cash  basis 
creates,  by  discounting  and  loans,  the  right 
to  draw  cheques,  confident  in  the  expectation 
that  the  cheques  drawn  by  one  customer  will 
be  paid  into  it  by  another;  or  that,  on  the 
rare  occasions  on  which  the  right  to  draw  is 
used  by  withdrawals  of  actual  coin  or  notes, 
the  coin  or  notes  will  find  their  way  back  to 
it,  being  deposited  with  it  by  those  who 
receive  them." 


84  The  New  Economics 

The  banker,  whether  he  is  underwriting 
shares,  discounting  bills  of  exchange  or 
making  short-term  loans  to  his  clients  for 
the  provision  of  working  expenses,  is 
creating  debts  against  the  community,  and 
the  debt  cannot  be  cancelled  till  the  goods 
have  been  completed  and  sold  to  the 
consumer.  But  since  the  banks  themselves 
are  the  only  source  of  the  means  of  payment, 
the  payment  of  one  debt  cannot  result 
without  the  creation  of  another,  so  that 
society  is  continually  in  the  debt  of  these 
"  money-lenders  "  who  have  no  money  to 
lend. 


CHAPTER  ELEVEN 

COMMERCIAL     PROSPERITY 

THE  banks,  having  complete  control  of 
credit-issue,  can  encourage  or  depress  trade 
at  will ;  to  check  a  further  expansion  ot 
credit,  they  may  refuse  to  renew  loans, 
though  in  most  cases  a  rise  in  the  bank 
rate  of  interest  at  which  they  make  loans 
or  discount  bills  will  have  the  desired 
effect. 

The  Bank  of  England  rate  is  normally 
higher  than  the  market  rate,  because  the 
tributary  banks  regard  a  loan  from  the  Bank 
of  England  as  "  cash  "  on  which  they  may 
rear  a  credit  many  times  the  amount  of  the 
loan.  The  market  rate  in  this  connection  is 
the  rate  at  which  the  brokers  discount  bills 
and  the  banks  make  loans  to  their  customers, 


The  New  Economics 


other  than  brokers  or  discount  houses. 
The  Bank  of  England,  of  course,  discounts 
bills  for  its  own  customers  at  market  rate  in 
normal  times. 

Since  the  bill-brokers  work  on  loans  from 
the  banks  their  market  rate  of  discount  varies 
with  the  rise  and  fall  of  the  Bank  of  England 
rate.  If  a  rise  in  the  bank  rate  is  not 
sufficient  to  check  credit,  the  Bank  of 
England  will  enter  the  market  as  a 
borrower,  and  the  brokers  are  obliged  to 
raise  their  rate  of  discount  if  they  do  not  wish 
to  re-borrow  the  money  at  the  Bank  of 
England  rate,  a  higher  rate  than  the  market 
rate  at  which  they  have  lent  it. 

A  rise  in  the  bank  rate  may  not  have  any 
immediate  effect  if  there  are  large  stocks  of 
goods  on  the  market  and  credit  is  not  in 
demand — but  it  will  act  as  a  warning  to 
merchants  of  credit  curtailment. 

So  long  as  credit-issue  is  unregulated,  it  is 
inevitable  that  a  boom  in  trade  should  be 
followed  by  a  depression  in  trade,  accom- 


Commercial   Prosperity  87 

panied  by  heavy  losses  to  manufacturers 
and  traders  and  widespread  unemployment. 

An  expansion  of  credit  is  a  private 
permission  to  industry  to  fulfil  its  function  of 
producing  goods— not,  it  may  be  remarked, 
of  satisfying  the  needs  of  the  community,  for 
the  large  armies  of  the  proletariat  who 
should  represent  by  their  magnitude  the 
chief  market  for  necessities  have  little  or  no 
effective  demand  in  the  shape  of  actual 
purchasing  power  to  make  known  their 
little  wants,  and  must  perforce  remain 
patient,  if  dissatisfied,  while  the  goods  they 
have  toiled  to  procure  are  carefully  packed 
for  export. 

An  expansion  of  credit  does,  however, 
mean  that  the  industrial  machine  is  set  going 
again.  Thousands  of  men  who  have  been 
living  on  unemployment  relief  find  them- 
selves at  work  with  money  in  their  pockets, 
and,  after  the  fashion  of  men,  proceed  to 
spend  it. 

Shopkeepers,    finding    demand    increase, 


88  The  New  Economics 

raise  their  prices,  but  not  enough  to  check 
the  demand,  and  extend  their  orders  with 
wholesale  dealers  or  manufacturers ;  whilst 
manufacturers,  in  response  to  the  stimulated 
demand,  also  raise  their  prices.  The 
apparent  prosperity  invites  a  still  further 
expansion  of  credit,  employment  is  increased, 
and  consequently  purchasing  power,  and 
there  is  a  continuous  rise  in  price. 

It  does  not  follow,  of  course,  that  wages 
and  salaries  are  increased,  since  there  is 
always  concerted  action  on  the  part  of  the 
employing  section  of  the  community  to  keep 
wages  and  salaries  below  actual  subsistence 
level.  The  workmen,  to  keep  their  wages 
up  to  subsistence  level  in  the  teeth  of  rising 
prices,  strike  for  higher  wages ;  so  that  costs 
are  further  increased  and  prices  rise  higher 
still. 

It  is  obvious  that  this  rapid  rise  in  price 
cannot  continue  indefinitely.  A  time  must 
come  when  supply  oversteps  effective 
demand;  warehouses — as  in  the  present 


Commercial   Prosperity  89 

depression  of  trade,  following  the  recent 
trade-boom — will  be  crammed  with  goods 
which  the  public  desperately  need  but  are 
unable  to  purchase.  Bankers,  fearing 
insolvency,  will  call  in  their  loans  and  restrict 
further  issues  by  raising  their  rate  of  interest. 

Wholesale  and  retail  dealers  are  dependent 
on  bank-loans  to  cover  their  temporary 
indebtedness  before  the  sale  of  the  goods  to 
the  consumer.  Since  their  percentage  profit 
is  comparatively  small,  and  they  are 
dependent  on  a  large  turn-over,  a  rise  in  the 
bank-rate  is  a  matter  for  alarm.  It  portends, 
moreover,  a  falling  off  in  demand,  and  they 
may  have  on  hand  large  stocks  of  merchan- 
dise for  which  they  are  still  in  debt  to  the 
bank,  and  which  they  will  be  obliged  to  sell 
on  a  falling  market  at  lower  prices. 

Their  orders  for  fresh  supplies  are  not 
likely  to  be  considerable;  and  the  manu- 
facturers, finding  orders  are  diminishing, 
prepare  for  a  period  of  trade  depression. 
Prices  drop,  and  as  the  workmen  struck  for 


90  The  New  Economics 

higher  wages  to  meet  higher  prices,  the 
employers  now  declare  a  lock-out  to  bring 
wages  back  to  their  former  level. 

Thousands  are  thrown  out  of  work,  and 
industries  are  closed  down  or  run  on  half- 
time  ;  and  until  the  banks  take  measures  to 
expand  credit  by  lowering  the  bank  rate,  the 
decrease  in  purchasing  power  will  be 
continuous,  since  every  decrease  in  pur- 
chasing power  means  a  decrease  in  effective 
demand  and  further  unemployment  or  lower 
wages. 

In  a  period  of  very  acute  depression  even 
the  lowering  of  the  bank  rate  may  not  suffice 
to  move  the  wheels  of  industry,  which  a 
restricted  home  market  has  rendered  utterly 
dependent  on  export  trade.  The  export 
markets  may  be  already  glutted  with  goods 
in  excess  of  effective  demand. 

It  only  remains  to  issue  purchasing  power 
abroad  at  the  public  expense  by  means  of  an 
export  credit,  as  was  recently  mooted,  to 
reach  the  limit  of  absurdity. 


CHAPTER    TWELVE 

THE  MISMANAGEMENT  OF  INDUSTRY 

IF  there  is  an  insufficient  and  unequal 
distribution  of  purchasing-power  within  a 
country,  and  yet  this  restricted  purchasing- 
power  is  dependent,  in  respect  of  the  bulk  of 
the  population,  on  employment  of  some  sort 
or  another,  it  follows  that  the  nation's 
energies  will  be  turned  to  the  manufacture 
of  capital  goods,  goods  for  export  and 
luxuries  to  meet  the  demand  of  the  well- 
to-do. 

If  all  charges  are  debited  to  the  consumer 
in  the  cost  of  the  goods,  there  will  be  no 
incitement  to  economy  in  working;  and  a 
further  waste  will  be  involved  in  the 
endeavour  to  create  a  demand  for  the  goods 


92  The  New  Economics 

at  home  or  discover  a  market  abroad. 
Those  that  control  the  actual  processes  of 
production  will  be  subordinate  to  those 
whose  business  it  is  to  attend  to  the  profit- 
making  aspects  and  fluctuations  of  the 
market. 

The  expense  of  effort  will  be  enormous. 
It  has  been  estimated  that  about  ten  per  cent 
of  the  energy  at  present  employed  would  be 
sufficient  to  keep  the  entire  population  in 
comfort.  "  It  is  well  known,"  says  Mr 
Thorstein  Veblen,  "  that  there  are  many  lines 
of  industry  in  which  the  cost  of  marketing 
the  goods  equals  the  cost  of  making  and 
transporting  them."  And,  according  to  the 
same  writer  elsewhere,  "  in  many  lines  sales- 
cost  is  ten  or  twenty  times  production  cost, 
and  not  less  than  one  hundred  times  the 
necessary  cost  of  distribution." 

The  complete  control  of  industry  by  a 
small  group  of  financiers  whose  interest  lies 
wholly  in  the  commercial  and  profit-making 
side,  and  who  are  often  quite  ignorant  of  the 


The   Mismanagement   of   Industry     93 

technical  and  managerial  side  of  the  industry, 
prevents  industry  from  serving  the  real  needs 
of  the  community  and  renders  it  wasteful  and 
inefficient. 

"  When  war  broke  out  many  leading 
U.S.  business  men  offered  their  services  at 
a  dollar  a  year.  They  found  that  the 
Government  had  taken  over  financial  opera- 
tions; that  there  was  no  selling  to  be  done, 
and  that  the  problem  quickly  reduced  itself 
to  one  of  production  in  which  many  of  them 
had  no  experience."  (H.  L.  Gantt.) 

The  reckless  mismanagement  of  the 
U.S.  coal  industry,  as  described  by  Mr 
W.  N.  Polakov,  may  be  cited  as  typical  of 
our  modern  business  methods.  '  Twentieth 
century  technology  has  outgrown  the 
eighteenth  century  system  of  vested  rights." 
The  Geological  Survey  figures  quoted  show 
a  waste  in  management  of  fifty  per  cent; 
500  million  tons  of  coal  being  wasted  annually 
by  abandoning  partially  exploited  mines, 
leaving  large  quantities  inside  mines  unre- 


94  The  New  Economics 

claimed,  wastage  of  coal-dust  or  inferior  coal, 
and  neglecting  to  utilise  bye-products. 

These  and  other  exposures  of  our  mis- 
managed industries  are  indictments  of  the 
economic  system  rather  than  of  the  operators. 
The  mine  owners,  for  example,  cannot  be 
blamed  for  not  mining  coal  at  a  cost  of  four 
dollars  per  ton  to  sell  at  the  price  of  two 
dollars.  "  It  is  more  profitable  to  them  to 
throw  away  the  life  and  prosperity  of  our 
grandchildren  than  incur  expenses  for 
reclamation  of  waste." 

With  our  present  system  all  overhead 
charges  are  distributed  over  the  output, 
however  small  the  output  may  be.  The 
expense  of  upkeep  of  plant  extensions, 
though  their  capital  value  has  already  been 
extracted  from  the  consumer  in  the  price  of 
the  product,  are  charged  to  the  consumer 
when  supply  outstrips  effective  demand  and 
the  plant  is  idle.  This,  including  interest  on 
the  money  value  of  the  machine,  insurance, 
taxes,  depreciation,  and  rent,  may  be  as 


The   Mismanagement   of   Industry    95 

much   as  one-third   the   total   value    of   the 
machine. 

Mr  H.  L.  Gantt,  in  his  "  Organising  for 
Work,"  gives  an  example  of  a  unit  of 
product  in  which  the  cost  is  made  up  of 
labour,  ten  cents ;  material,  eight  cents ;  and 
overhead  charges,  twelve  cents ;  the  factory 
running  at  one-third  of  its  capacity.  How, 
asked  Mr  Gantt,  would  the  twelve  cents  be 
paid  if  the  article  was  bought?  "  The 
obvious  answer  was  that  it  would  have  to  be 
distributed  over  the  product  still  being  made, 
and  would  thereby  increase  its  cost.  In  such 
a  case  it  would  probably  be  found  that  some 
other  article  was  costing  more  than  it  could 
be  bought  for;  and,  if  the  same  policy  were 
pursued,  and  the  second  article  should  be 
bought,  this  would  cause  the  remaining 
product  to  bear  a  still  higher  expense  rate. 
If  this  policy  were  pursued  to  its  logical 
conclusion,  the  manufacturer  would  be  buying 
everything  before  long,  and  be  obliged  to 
give  up  manufacturing  entirely." 


96  The  New  Economics 

The  overhead  charges  may  be  whatever 
the  promoting  company  think  the  industry 
will  carry.  It  is  a  common  error  even  in 
intelligent  circles  to  imagine  that  our  immense 
capital  aggregations  have  been  built  up  on 
the  savings  of  the  population.  The  error, 
perhaps,  need  not  be  wondered  at,  since  it 
has  been  insidiously  cultivated  by  the  small 
group  that  controls  industry  through  finance, 
and  by  its  agents  in  the  popular  press.  It 
naturally  suits  the  banker-financier  to  spread 
the  belief  that  capital  development  is  the 
work  of  generations  of  thrifty  little  house- 
holders. It  unites  all  those  who  have  saved 
a  few  hundreds  or  thousands  against  the 
many  millions  of  the  completely  dispossessed, 
and  enables  the  real  controllers  of  our 
destinies  to  milk  indiscriminately,  entre- 
preneurs, middle-men,  proletariat,  investors, 
and  consumers  generally. 

It  is  true  that,  prior  to  the  development  of 
mass  production,  businesses  were  to  a  large 
extent  sustained  by  the  small  savings  of 


The   Mismanagement    of   Industry     97 

thrifty  individuals;  in  those  days  a  banker 
was  a  man  who  knew  intimately  all  his  clients' 
affairs  and  "  lent  money  against  a  three 
months'  commercial  bill,"  and  the  small 
employer  had  not  given  place  to  the  limited 
liability  company. 

It  was  found,  by  a  few  enterprising 
company-promoters,  in  the  early  days  of 
industrial  development,  that  large-scale 
production  minimised  costs ;  and  that  by 
pooling  their  capital,  they  could  crush  out  the 
small  owner,  and  obtaining  entire  control  of 
some  industry  sell  their  goods  at  what  price 
they  pleased.  Since  those  days,  the  history 
of  capitalist  enterprise  has  been  a  record  of 
the  growth  of  combines,  trusts,  and  price- 
rings,  in  whose  grip  the  investing  public  and 
the  consumer  are  alike  helpless. 

The  capital  of  a  company  will  be  calculated 
on  its  estimated  earning  capacity,  and  the 
manager  told  he  must  meet  the  charges  or 
this  capitalisation. 

The    shares    are    in    most   cases    "  under 

G 


The  New  Economics 


written  "  by  the  banking  company,  investment 
trust,  or  other  concern  financing  the  venture : 
that  is,  they  are  guaranteed,  financial  credit 
being  created  against  the  real  credit  of  the 
community.  A  portion  of  the  shares  will  be 
taken  up  by  the  public  later ;  but  large  blocks 
of  shares  are  retained  by  the  promoters — the 
expenses,  directors'  fees  and  heavy  under- 
writing commission,  amounting  perhaps  to 
more  than  ten  per  cent  on  the  issue, 
being  sheared  from  the  lamb-like  investing 
public. 

In  the  case  of  a  doubtful  venture  that  is 
not  expected  to  cover  the  charges  on  its 
capitalisation,  these  shares  will  be  unloaded 
on  the  public  later  at  an  enhanced  price, 
after  being  duly  boomed  in  the  finance 
columns  of  the  press. 

In  many  successful  businesses,  on  the 
other  hand,  the  initial  costs  of  the  enterprise 
are  covered  by  the  issue  to  the  public  of 
debenture  stock  or  preference  shares  carrying 
a  small  fixed  rate  of  interest,  while  the 


The   Mismanagement    of   Industry     99 

ordinary    shares    carrying    the    profits    are 
retained  by  those  running  the  concern. 

Since  all  costs  are  debited  to  the  consumer 
in  the  price  of  the  article,  such  small  profits 
as  may  accrue  to  John  Citizen  as  investor  are 
rapidly  filched  from  him  as  consumer. 


CHAPTER    THIRTEEN 

MALTHUS AND    OTHER   NIGHT    FEARS 

IT  is  curious  that  truth,  in  the  realm  of 
economics  at  least,  must  always  blush  unseen ; 
Gresham's  Law,  that  counterfeit  money 
drives  out  good  money  could  more  truthfully 
be  applied  to  the  kingdom  of  ideas,  for  false 
speculations  certainly  flourish  like  weeds. 

We  cling  stupidly  to  ideas  that  have  long 
since  out-lived  their  validity.  According  to 
the  laisser  faire  doctrines  of  the  early 
economists,  a  small  army  of  manufacturers 
competing  honestly  and  strenuously  for  the 
demand  of  a  pampered  public  could  be  relied 
upon  to  keep  price  low,  and  the  Government 
could  confine  its  attention  to  "  pure  politics  " 
with  a  clear  conscience.  But  economic 
power  precedes  political  power,  and  alas !  the 


Malthus — and  other  Night  Fears     101 

politics  are  no  longer  pure,  and  the  conscience 
has  grown  muddy. 

The  army  of  small  manufacturers  no 
longer  exists  except  in  the  heated  imagination 
of  our  eminent  politicians,  and  the  financial 
combines  and  price-rings  that  control  our 
industrial  destinies  can  be  relied  upon  to 
keep  both  supply  and  demand  in  short  supply, 
and  arrange  that  instead  of  supply  competing 
very  strenuously  for  demand,  demand  shall 
compete  just  as  strenuously  for  a  short  supply. 

Our  financial  rulers  are  concerned  only  to 
get  back  from  the  public  the  moneys  they 
have  issued,  with  the  least  possible  friction 
and  delay,  and  the  public  is  always  willing  to 
oblige.  After  all,  it  must  live,  and  if  it  can 
live  without  thinking,  so  much  the  worse. 

The  chief  enemies  of  the  human  race  were 
always  ignorance  and  superstition.  So, 
having  wealth,  we  refuse  to  enjoy  it,  burden 
ourselves  with  unemployment  and  high 
taxation,  and  stifle  our  reason  with  "  Germany 
Can  and  Must  Pay." 


102  The  New  Economics 

Germany  could  and  would  pay  very  easily, 
but  it  could  hardly  be  expected  to  occur  to  us 
that  a  gift  of  goods,  unless  it  were  met  with  a 
distribution  of  money-tokens,  would  merely 
compete  with  our  own  supply  and  augment 
our  other  heritage  of  unemployment. 

The  arrangement  by  which  we  add  to  the 
cost  of  our  importations  from  Germany,  and 
thus  pay  Germany's  indemnity,  is,  though  a 
somewhat  roundabout  way  of  doing  it, 
eminently  satisfactory  under  the  circum- 
stances, since  by  no  possible  arrangement, 
however  ingenious,  could  Germany  pay  us  an 
indemnity  while  we  maintain  our  present 
economic  system. 

By  that  system  we  refuse  to  distribute 
goods  at  home,  and  deny  our  own  people  the 
means  of  livelihood  because  we  are  unable  to 
employ  them  in  manufacturing  for  export. 
It  will  say  a  great  deal  for  human  insanity  if 
such  a  system  persists  until  it  crushes  us  in 
its  downfall. 

Germany,    without    having    escaped    the 


Malthus — and  other  Night  Fears     103 

mania  of  manufacturing  for  export,  succeeded 
in  puzzling  our  foreign  exchange  experts, 
and  incidentally  in  capturing  our  trade,  by  the 
simple  and  obvious  process  of  reducing  price 
by  a  creation  of  credit. 

In  all  sanity,  increased  capacity  to  produce 
must  be  reflected  in  an  expansion  of  credit. 
The  crash  can  only  come  if  the  country 
expands  her  credit  beyond  the  limits  of  her 
capacity  to  produce.  If  a  country  lowers  its 
prices  for  the  home  consumer  as  its  capacity 
to  produce  increases,  making  up  the  differ- 
ence between  price  and  cost  by  a  creation  of 
credit,  it  will  be  able  to  sell  abroad  at  any 
price  sufficient  to  undercut  its  competitors. 

In  Germany's  case  the  benefit  accrued  to 
the  exporting  manufacturer;  the  fight  for 
export  markets  still  continued  though  the 
"  unemployment  problem  "  was  shelved  for 
a  time.  Nevertheless,  though  prices  in 
Germany  are  high,  they  are  only  a 
fraction  of  the  export  price ;  and  her  raw 
materials  are  bought,  not  with  the  depreci- 


104  The  New  Economics 

ated  mark,  but  with  the  credit  obtained  for 
the  goods  she  exports.  As  the  mark  de- 
preciates in  terms  of  our  currency,  Ger- 
many pays  more  in  terms  of  marks  for  her 
raw  material,  but  obtains  more  from  us  in 
terms  of  marks  for  her  finished  products. 

The  manufacture  of  credit  corresponding 
to  capacity  for  production  is  really  much 
simpler  than  the  manufacture  of  explosives; 
and  if  applied  in  time,  so  as  to  benefit  the 
home  consumer  and  not  merely  the  exporting 
manufacturer,  would  prevent  the  coming 
war. 

As  for  our  own  War  Debt,  it  is  impossible 
to  deny  that  a  small  part  of  it  was  contributed 
from  savings:  so  small  as  to  be  negligible. 
The  interest  which  is  ground  out  of  us  by 
taxation  is  for  the  most  part  the  interest  on 
the  public  credit  which  the  banks  have 
monopolised,  loaning  it  to  the  Government  at 
interest,  or  to  the  Government  by  way  of 
"  overdrafts "  to  their  customers.  Any 
reduction  in  taxation  entailing  further 


Malthus — and  other  Night  Fears     105 

Government  borrowing  will  further  increase 
our  debt  to  the  banks  for  the  use  of  our  own 
credit. 

We  might  have  entitled  this  section  a 
chapter  on  truisms,  though  they  are  not  so 
familiar  to  the  general  public  as  the  fallacies 
they  should  replace.  Another  strange  theory 
that  has  taken  complete  possession  of  the 
mind  of  the  man  in  the  street  is  that  we  are 
a  poorer  nation  than  we  were  before  the  war. 
As  a  matter  of  fact,  according  to  Mr  Edgar 
Crammond,  Managing  Director  of  the  British 
Shareholders'  Trust,  our  productive  capacity 
is  at  least  fifty  per  cent  above  pre-war 
standard;  while,  in  response  to  an  inquiry, 
some  firms  reported  they  had  four  times  as 
much  plant  as  they  had  prior  to  the  war. 

Driven  from  this  position,  the  average 
newspaper  reader  will,  if  he  has  read  his 
newspaper  properly,  fall  back  on  the  theory 
that  population  is  pressing  on  the  means  of 
subsistence.  How  population  can  be  press- 
ing on  the  means  of  subsistence,  with 


106  The  New  Economics 

several  millions  unemployed,  and  wheat  being 
burnt  because  it  cannot  be  distributed  except 
at  a  financial  loss,  only  a  Neo-Malthusian 
could  inform  us,  and  that  not  very  coherently. 

We  are,  it  is  true,  dependent  largely  for 
our  foodstuffs  on  supplies  from  abroad,  more 
particularly  as  regards  wheat  and  dairy 
produce.  The  United  Kingdom  is  peculiar 
in  this  respect,  although  the  reason  is  not 
that  population  is  pressing  on  the  means  of 
subsistence,  but  that  British  agriculture  has 
declined,  while  "  newer  countries  are  able  to 
send,  at  low  prices  for  ocean  transport, 
enormous  supplies  of  wheat,  at  prices  with 
which  we  could  not  compete  "  (E.  A.  Pratt). 

It  is  quite  true  that  the  population,  mainly 
owing  to  extreme  poverty,  has  increased 
considerably  in  the  last  half-century.  It  has 
increased  by  about  fifty  per  cent.  Our 
imports  of  wheat  in  1850  amounted  to  twenty 
million  hundredweights,  in  1870  to  forty-five 
million  hundredweights,  but  in  1913  to  one 
hundred  million  hundredweights.  Three 


Malthus — and  other  Night  Fears     107 

million  acres  of  land  under  crops  in  1880 
went  out  of  cultivation  in  the  next  twenty  or 
thirty  years. 

We  forget  what  Mr  Gladstone  said  in 
1863,  but  our  memory  goes  back  to  1919, 
when  Mr  Lloyd  George  said  something 
equally  pertinent,  pointing  the  decline  of 
British  agriculture.  On  every  hundred 
acres,  he  said,  Britain  feeds  less  than  fifty 
people,  Germany  over  seventy,  Germany 
producing  double  our  supply  of  milk,  corn, 
and  so  on.  Denmark,  with  a  very  poor  soil, 
has,  since  1871,  more  than  doubled  her 
production  of  corn  and  doubled  her  supply  of 
cattle. 

The  same  might  be  said  of  most  European 
countries  prior  to  the  war;  France  being, 
as  Kropotkin  pointed  out,  almost  self- 
supporting,  and  Belgium,  with  a  much  denser 
population  than  Great  Britain,  almost  so,  and 
exporting  large  quantities. 

"  Our  yield  per  acre,  in  spite  of  the  richness 
of  our  land,  was  four  pounds  compared  with 


108  The  New  Economics 

Belgium's  twenty  pounds  "  (F.  E.  Green). 
Ninety  per  cent  of  our  timber  imports  could 
be  grown  at  home,  some  nine  million  acres 
being  available  without  material  encroach- 
ment on  agricultural  land. 

Kropotkin  reminded  us  that  there  are 
thirty-three  million  acres  of  cultivable  land  in 
Great  Britain,  and  that  some  seventeen 
million  acres  are  waste.  In  spite  of  our 
efforts  during  the  war,  when  our  supplies 
from  abroad  were  in  danger  of  being  cut  off, 
the  figures  are  still  true  to-day.  "  If  popu- 
lation came  to  be  doubled,  it  would  only  be 
necessary  to  cultivate  the  soil  as  it  is 
cultivated  in  the  best  farms  of  the  country, 
Lombardy  and  Flanders,  and  utilise  some 
meadows  which  at  present  lie  fallow." 

It  is  admittedly  very  unhealthy  to  be  as 
dependent  as  we  are  on  supplies  from  abroad. 
The  area  under  grass  is  out  of  all  proportion 
to  its  yield  in  meat  and  dairy  produce. 
Apart  from  the  fatting  pastures,  "  the  bulk  of 
the  grass  land  in  the  country  could,  at  best, 


Malthus — and  other  Night  Fears     109 

only  be  described  as  useful,  and  with  skilled 
management  and  a  due  expenditure  upon 
labour  would  pay  the  farmer  just  as  well 
under  the  plough,  while  it  would  yield  for 
the  nation  more  than  twice  as  much  food  in 
the  shape  of  meat  or  milk,  or  ten  times  as 
much  in  the  form  of  grain  "  (A.  D.  Hall). 

The  same  writer  estimates  that  another 
3,340,000  acres  under  wheat  would  at  an 
average  yield  of  four  quarters  per  acre,  raise 
the  home  production  from  about  twenty  per 
cent  to  nearly  sixty  per  cent  of  our  total 
consumption.  It  is  quite  arguable  that  we 
could  be  completely  self-supporting,  though 
whether  it  would  be  policy  to  be  so  is  another 
matter.  Our  greatest  concern  is  with  the 
long-lived  heresy  that,  whilst  admitting  there 
is  no  limit  to  the  bounty  of  the  earth, 
population  increases  more  rapidly  than  the 
means  of  subsistence. 

In  trying  to  understand  the  longevity  of 
Malthus's  fantastic  speculations  that  popula- 
tion increases  in  geometrical  ratio  and  food 


110  The  New  Economics 

only  in  arithmetical  ratio,  neither  of  which 
have  any  foundation  whatever  in  fact,  it 
should  always  be  remembered  that  they  were 
put  forward,  not  on  scientific  grounds,  but 
with  the  deliberate  aim  of  preventing  the 
emancipation  of  the  workers. 

Population  and  food  supply  do  not  increase 
in  any  precise  ratio.  Food  supply  is 
governed  purely  by  methods  of  cultivation ; 
and  statistical  and  biological  evidence  sup- 
ports the  view  that  far  from  fertility  being  a 
cause  of  poverty,  the  poverty  of  a  people 
results  (as  remarked  by  Doubleday,  whose 
work  has  been  recently  brought  to  light  by 
Mr  C.  E.  Pell,  in  his  "  Law  of  Births  and 
Deaths  ")  in  a  corresponding  effort  being 
"  made  by  Nature  for  its  preservation  and 
continuance  by  an  increase  of  fertility,  and 
this  especially  takes  place  whenever  such 
danger  arises  from  a  diminution  of  proper 
nourishment  or  food." 

Fertility     varies     with     profession     and 
mode  of  living,  and  diminishes  as  we  ascend 


Malthas — and  other  Night  Fears     111 

the  social  scale ;  and  famines,  wars,  and 
pestilence,  that  were  put  forward  by  Malthus 
as  Nature's  checks  on  population,  are  in  fact, 
products  of  a  faulty  economic  system,  which 
breeds  poverty  and  disease,  and  so  encour- 
ages the  high  birth-rate,  while  a  high  death- 
rate  is  its  own  check  and  not  Nature's. 

On  the  evidence  of  Dr  Halford  Ross, 
Medical  Officer  for  the  Suez  Canal  Zone, 
when  during  the  years  1901  to  1910,  health 
measures  reduced  the  death-rate  from  fever, 
the  birth-rate  fell  too.  The  Malthusian  of 
1 5th  July,  1921,  quoted  the  "  Encyclopaedia 
Britannica  "  to  show  that  from  1723  to  1846 
the  population  of  Japan  remained  almost 
stationary,  while  during  the  period  1897  to 
1907  it  received  an  increment  of  n-6  per 
cent,  whereas  the  food-producing  area 
increased  by  only  4-4  per  cent. 

"  It  is  impossible  to  believe,"  commented 
Mr  A.  E.  Randall  in  The  New  Age, 
"  that  the  Japanese  used  contraceptive 
measures  during  the  '  barbarous  '  period, 


112  The  New  Economics 

1723-1846,  and  ceased  to  use  them  after  the 
coup  d'etat  of  1867,  when  contact  with  the 
outer  world  was  enormously  extended.  We 
are  confronted  with  a  biological  fact ;  fertility 
varies  under  the  influence  of  environment." 

"  The  end  of  the  world  is  a  more  imminent 
event  than  its  over-population,"  remarks  Dr 
Halliday  Sutherland,  whose  book,  "  Birth 
Control,"  is  a  resume  of  the  arguments 
against  Malthus. 

Not  birth-regulation,  but  price-regulation 
is  the  proper  study  of  mankind  at  the  present 
moment. 


CHAPTER     FOURTEEN 

THE  FIGHT  FOR  EXPORT  MARKETS 

THE  economic  problem  that  confronts  this 
generation  is  the  problem  of  over-production, 
or  under-consumption.  It  may  seem  strange 
that  society  should  suffer  from  an  actual 
plenitude  of  goods,  and  it  is  still  stranger 
when  we  consider  that  millions  of  the 
population  live  in  the  direst  poverty  while  the 
goods  they  are  unable  to  purchase  rot  in  the 
warehouses. 

The  truth  is  that  modern  scientific  machine- 
production  has  outgrown  our  mediaeval 
financial  system,  based  on  the  idea  of 
"  money-lending."  The  financial  group  do 
all  in  their  power  to  maintain  the  super- 
stition that  money  is  a  commodity  which  may 
be  loaned  out  at  interest,  and  is  strictly 
limited  in  quantity. 

H 


114  The  New  Economics 

Because  in  a  more  primitive  era  some 
material  such  as  gold  was  chosen  as  the 
means  of  exchange,  our  modern  "  money- 
lenders "  still  pretend  that  they  have 
"  money  "  of  this  sort  to  lend,  and  hope  by 
this  means  to  disguise  the  fact  that  they  are 
exploiting  the  public  credit. 

To  have  money  in  one's  pocket  signifies 
that  society  is  in  one's  debt  to  that  amount, 
and  the  debt  is  discharged  when  the  money  is 
spent.  Similarly,  when  the  banks  issue 
credit  to  their  clients  by  manufacturing  an 
"  overdraft,"  what  they  do  in  effect  is  to 
create  a  debt  against  the  community  for  the 
amount  of  the  loan.  The  real  credit  of  the 
community,  its  capacity  to  produce  goods, 
has  been  pledged  to  that  amount. 

We  have  now  to  deal  with  the  actual 
process  by  which  purchasing  power  is  issued, 
and  show  why  it  is  insufficient  to  buy  the 
product  of  industry. 

We  know  by  unhappy  experience  that  if 
nominal  purchasing  power  is  increased  prices 


The   Fight  for   Export  Markets     115 

rise,  and  this  leads  us  to  the  conclusion, 
which  is  in  fact  a  true  one,  that  the  general 
level  of  prices  depends  at  present  on  the 
amount  of  money  in  circulation,  using  money 
in  its  widest  sense  of  "  purchasing  power." 
This  is  roughly  what  is  known  as  the 
Quantity  Theory  of  Money. 

"  It  cannot  be  shown,"  as  Professor  Irving 
Fisher  says,  "  that  there  is  any  tendency  for 
an  increase  in  the  quantity  of  money  to 
decrease  its  velocity  of  circulation.  Some 
persons  who  have  never  investigated  the 
subject  imagine  that  if  money  were  suddenly 
doubled  in  quantity,  prices  need  not  rise,  but 
that  the  public  would,  for  some  unaccountable 
reason,  carry  double  the  former  quantity  of 
money  while  expending  precisely  the  same 
amounts ;  in  other  words,  that  the  velocity  of 
circulation  of  money  would  decrease." 

'  This  conclusion  cannot  be  avoided  by 
supposing  that  most  of  the  money  is  not  spent 
in  trade,  but  deposited  in  banks.  The 
bankers  whose  deposits  are  thus  suddenly 


116  The  New  Economics 

swollen  will  now  be  the  ones  who  will  strive 
to  get  rid  of  the  surplus  cash.  No  banker 
wishes  to  have  idle  reserves,  and  each  will 
make  the  increase  in  reserves  the  basis  for  an 
increase  of  business,  including  an  increase  of 
deposits." 

It  is,  we  need  hardly  say,  neither  scientific 
nor  reasonable,  and  it  is  certainly  not 
economical,  for  every  increase  in  the  nominal 
income  of  the  population  to  cancel  itself  out 
almost  immediately  by  raising  prices  propor- 
tionately. 

Under  any  rational  system,  each  increase 
in  the  potential  productivity  of  the  industrial 
machine,  whether  by  plant  extension  or  the 
introduction  of  fresh  labour-saving  devices, 
would  be  accompanied  either  by  an  increase 
in  the  spending  power  of  the  population 
sufficient,  at  least,  to  meet  the  possible 
increased  output  of  consumable  products,  or, 
assuming  the  output  of  consumable  products 
to  be  already  sufficient,  by  some  method 
of  shortening  the  working  day  of  those 


The    Fight   for   Export   Markets     117 

employed  in  production  without  decreasing 
their  purchasing  power. 

Whereas,  at  present,  the  effect  of  the 
introduction  of  any  new  labour-saving  process 
will  be  either  to  throw  a  number  of  men  out 
of  work  altogether  or  to  divert  their  energies 
from  the  manufacture  of  ultimate  consumable 
goods  to  constructional  work  or  plant 
extension,  thus  increasing  the  supply  of 
money  without,  at  the  same  time,  increasing 
the  supply  of  consumable  goods,  and 
consequently  raising  prices  all  round. 

So  that  society  is  actually  poorer,  in 
purchasing  power  or  ability  to  consume,  for 
every  increase  in  its  potential  wealth  or 
ability  to  produce. 

However  rich  a  country  may  be  in  natural 
resources,  machine-power  and  labour-power, 
its  resources  can  never  be  fully  utilised,  and 
the  standard  of  living  of  its  population  as  a 
whole  can  never  be  improved  while  price  is 
allowed  to  fluctuate  according  to  the  amount 
of  money  on  the  market.  Any  attempt  to 


118  The  New  Economics 

augment  the  national  income  will  tend  merely 
to  raise  prices  and  lower  the  value  of  the 
monetary-unit. 

The  wage-earning  section,  including  small 
salaried  workers,  comprising  the  bulk  of  the 
population,  being  kept  permanently  at  the 
lowest  possible  level  of  subsistence,  the  home 
market  for  most  manufactured  articles  can 
hardly  be  said  to  exist.  The  professional 
and  business  classes  and  higher  salaried 
workers  will  be  able  to  supplement  their 
income  from  investment.  Consequently, 
much  of  the  nation's  energy  will  be  turned  to 
the  manufacture  of  luxury  goods  for  the 
well-to-do ;  thus  further  increasing  the  price 
of  necessities,  since  the  purchasing  power 
issued  as  wages  in  their  manufacture  and 
distribution  does  not  enter  the  market  against 
the  luxury  goods  themselves,  but  against  the 
necessities  of  life. 

Beyond  expenditure  on  luxury  goods,  the 
incomes  of  the  well-to-do  portion  of  the 
community  will  be  spent  on  capital  invest- 


The  Fight  for  Export  Market       119 

ment — that  is  to  say,  on  the  construction  of 
fixed  capital,  which  will  further  increase  the 
price  of  necessities  by  turning  the  nation's 
energies  to  the  manufacture  of  goods  which 
do  not  enter  the  market  as  consumable 
products,  and  thereby  increasing  the  propor- 
tion of  money  to  consumable  goods. 

The  nation's  energies  will  be  turned  more 
and  more  to  the  manufacture  of  capital  goods, 
tending  more  and  more  to  diminish  the  home 
market  for  consumable  goods,  since  all 
capital  costs  are  debited  to  the  consumer  in 
the  price  of  the  ultimate  article.  The  price 
of  the  goods  bears  a  steadily  gathering 
burden  of  capital  charges,  and  the  supply 
to  the  home  consumer  is  correspondingly 
diminished. 

The  home  market  for  ultimate  goods  being 
restricted,  it  also  follows  that  the  exports  of 
this  country  will  be  paid  for  mainly  by  the 
raw  materials  for  still  further  export  of 
manufactured  articles. 

There  is  thus  an   ever-increasing  rivalry 


120  The  New  Economics 

between  the  various  manufacturing  nations 
for  the  strange  privilege  of  dumping  their 
goods  abroad,  and  a  continuous  lowering  of 
the  value  of  manufactured  articles  in  terms  of 
foodstuffs.  Each  new  invention  that  should 
mean  that  the  nation  responsible  benefits 
either  by  increased  consumption  or  by  added 
leisure  means  merely  that  that  country  is 
enabled  to  dump  more  goods  abroad  than  its 
neighbours.  And  so  it  goes  on. 

One  of  the  results  of  this  is  an  ever- 
increasing  dependence  on  abroad  for  food- 
stuffs by  the  countries  engaged  in  this  strange 
rivalry,  since  all  their  energies  must  be  turned 
to  production  for  export  to  compete  with  their 
neighbours.  The  newer  countries,  not  to  be 
outdone,  and  aided  by  an  export  of  capital 
goods  from  the  older  countries,  now  evince  a 
strong  desire  to  enter  this  peculiar  contest; 
and  we  have  the  spectacle,  at  which  the  gods 
must  laugh,  of  all  the  nations  of  the  world 
competing  for  an  ever-diminishing  supply  of 
foodstuffs. 


The  Fight  for  Export  Market      121 

Perhaps  we  should  not  use  the  phrase 
"  ever-diminishing."  Heaven  preserve  us, 
we  shall  have  the  Malthusians  after  us!  We 
mean,  of  course,  that  the  supply  is  diminish- 
ing because  nations  are  turning  their  energies 
away  from  agriculture  to  the  mere  fight  for 
export  markets. 

But  since  the  market  for  manufactures  in 
those  countries  not  yet  regarded  as  manufac- 
turing consists  of  a  limited  effective  demand, 
and  since  that  demand,  limited  as  it  is,  is 
rapidly  being  met  by  the  countries  themselves 
now  entering  the  manufacturing  arena, 
countries  manufacturing  for  export  must 
compete  with  each  other  for  a  rapidly 
diminishing  export  market. 

Such  a  struggle  for  export  markets  can 
have  only  one  end,  a  world-war,  when  the 
peoples  of  this  earth  will  writhe  dutifully  in 
the  agonies  of  mustard-gas,  because  they  are 
unable  to  distribute  the  product  of  industry. 


CHAPTER    FIFTEEN 

HOW  PRICES  ARE  FIXED 

THE  conclusions  reached  in  our  last  chapter 
are  those  of  Mr  C.  H.  Douglas  in  his  work: 
"  Credit,  Power,  and  Democracy,"  and  it  is 
with  Mr  Douglas's  analysis  that  we  are  now 
more  directly  concerned. 

No  one  who  has  followed  us  thus  far  in 
our  argument  can  have  failed  to  realise  that 
the  problem  with  which  our  civilisation  is 
faced  is  simply  and  solely  a  defect  of  pur- 
chasing power,  though  it  is  almost  in  the 
nature  of  anti-climax  to  admit  it!  We  have 
the  machines,  we  have  the  men,  but  the 
money  which  would  purchase  the  necessities 
of  life  we  are  unable  to  distribute. 

This  insufficiency  of  purchasing  power 
rests  on  two  factors.  In  the  first  place, 


How    Prices    are    Fixed  123 

machine-production  is  rapidly  displacing 
human  labour — the  machines  are  doing  our 
work  for  us ;  yet  the  mass  of  the  population 
being,  by  our  "  economic  "  system,  dependent 
for  their  livelihood  solely  on  having  some  sort 
of  work  no  matter  how  inherently  useless, 
they  could  not  exist  at  all  unless  work  was 
made  for  them. 

Thus  they  are  set  to  labour  on  construc- 
tional work,  building  machines  which  could 
flood  the  earth  with  goods  we  are  utterly 
unable  to  distribute.  In  the  periods  of 
"  trade-depression,"  which  follow  on  periods 
of  "  trade-expansion  " — and  mean  merely  that 
we  have  exported  till  the  markets  of  the 
world  are  glutted  with  goods  for  which  there 
is  no  effective  demand — millions  are  thrown 
out  of  employment  which  represents  their 
only  means  of  livelihood. 

On  the  other  hand,  if  work  is  found  for 
them,  at  the  public  expense,  to  enable  them 
to  live,  there  is  an  issue  of  purchasing  power 
which  does  not  simultaneously  increase  the 


124  The  New  Economics 

supply  of  consumable  goods,  and  conse- 
quently the  prices  of  goods  on  the  market 
are  raised,  and  the  rest  of  the  community  has 
its  purchasing  power  diminished;  and  since 
higher  prices  mean  higher  costs,  the  "  trade 
depression  "  becomes  more  acute,  and  still 
more  men  are  thrown  on  the  public  purse. 

This  in  itself  is  a  sufficient  condemnation 
of  a  system,  that  it  can  only  benefit  one 
section  of  the  community  at  the  expense  of 
the  rest. 

The  other  factor  in  defect  of  purchasing 
power  is  obviously  the  factor  of  price.  Those 
who  have  never  studied  the  subject  are  often 
heard  declaring  stoutly,  "  that  we  cannot 
interfere  with  the  law  of  supply  and  demand." 
No  greater  nonsense  has  ever  been  planted 
by  a  popular  press  in  the  minds  of  a  great 
people. 

Prices  at  present  vary  quite  arbitrarily 
according  to  the  amount  of  money  on  the 
market ;  but  this  means  that  every  attempt  to 
increase  purchasing  power  for  one  section  of 


How   Prices   are   Fixed  125 

the  community  would,  under  this  system, 
merely  result  in  higher  prices,  and  conse- 
quently decreased  purchasing  power  for  the 
community  as  a  whole. 

There  is,  with  our  present  system  of  price 
fixing,  no  escape  from  this  dilemma.  Under 
this  strange  system,  purchasing  power  can 
only  safely  be  issued  if  the  amount  of 
consumable  goods  on  the  market  are 
simultaneously  and  proportionately  increased. 
But  this  is  clearly  impossible ;  even  when  the 
purchasing  power  is  issued  as  wages  and 
dividends  during  the  manufacture  of  immedi- 
ate consumable  articles,  a  considerable  period 
must  elapse  before  the  goods  are  offered  for 
sale.  Still  less,  then,  in  the  issue  of  wages, 
salaries  or  dividends  on  account  of  the 
erection  of  manufacturing  plant,  can  we 
expect  any  reserve  of  purchasing  power  when 
the  plant  is  finally  used  in  the  production  of 
ultimate  articles. 

We  wish  to  make  this  clear  beyond  any 
possibility  of  doubt.  Suppose  a  community 


126  The  New  Economics 

wishes  to  build  plant  that  will  turn  out  goods 
with  less  expenditure  of  labour  than  formerly, 
thus  enabling  the  community  to  increase  its 
production  and  consumption  of  goods.  Now 
it  is  obvious  that  money  will  be  issued  in 
wages  and  dividends  during  the  construction 
of  the  plant,  and  that  this  represents  a 
nominal  increase  of  purchasing  power.  It 
is  also  surely  obvious  that  this  purchasing 
power  must  remain  in  reserve  until  the 
product  is  actually  completed  and  on  the 
market,  if  the  community  is  to  enjoy  the  fruit 
of  its  labour. 

Now  remark  what  happens  under  our  own 
system.  The  money  is  certainly  issued  as 
wages,  salaries,  dividends,  but  far  from 
remaining  as  a  reserve  of  purchasing  power 
against  the  ultimate  goods  when  made,  it 
merely  serves  to  raise  the  price  for  everybody 
(including  those  with  fixed  incomes,  the  bulk 
of  the  population)  of  the  cost  of  living  goods 
at  that  time  on  the  market.  So  that  when 
the  ultimate  goods  on  account  of  which  the 


How    Prices   are   Fixed  127 

plant  extension  was  undertaken  are  eventually 
made  and  offered  for  sale,  there  is  no 
"  effective  "  demand  unless  fresh  construc- 
tional work  is  undertaken,  which  still  further 
increases  our  powers  of  production  and  still 
further  decreases  our  power  of  purchasing  the 
product. 

To  enable  the  industrial  machine  to 
function  we  must  maintain  an  effective 
reserve  of  purchasing  power.  To  do  this  we 
must  arrange  (i)  that  each  displacement  of 
human  labour  by  machines  does  not  result  in 
a  decrease  of  purchasing  power,  and  (2)  that 
purchasing  power  is  increased  when  our 
powers  of  production  are  increased ;  and  this, 
it  follows,  can  only  be  achieved  by  arranging 
that  price  shall  no  longer  be  the  ratio  of 
money  to  goods,  but  the  ratio  of  consumption 
to  production — enabling  our  power  of  pur- 
chasing the  product  to  be  increased  instead  of 
decreased  with  each  advance  in  our  powers  of 
production. 

Before  stating  this  more  precisely  let  us  be 


128  The  New  Economics 

quite  clear  as  to  present  methods  of  price- 
fixing. 

It  ought  not  to  surprise  the  reader  to  learn 
that  price  is  an  all-important  factor  in  the 
destinies  of  nations,  since  it  is  only  by  a 
correct  regulation  of  price  that  a  community 
can  enjoy  the  product  of  its  labours. 

At  present,  prices  vary  according  to  the 
amount  of  money  on  the  market;  that  is  to 
say,  with  the  expansion  or  contraction  of 
credit,  irrespective  of  the  needs  of  the 
community.  An  expansion  of  credit,  if  it  is 
not  accompanied  by  a  simultaneous  increase 
in  the  supply  of  consumable  goods,  must 
infallibly  raise  prices. 

To  say  that  prices  are  "  controlled  by  the 
law  of  supply  and  demand  "  is  a  delightfully 
vague  phrase,  carefully  calculated  to  convey 
the  impression  that  suppliers  are  competing 
for  a  fixed  demand.  Logically,  supply  need 
only  be  limited  by  the  needs  of  the  com- 
munity, and  demand  should  be  the  expression 
of  its  needs.  If  goods  and  purchasing  power 


How    Prices    are    Fixed  129 

are  both  kept  in  short  supply,  the  "  law  of 
supply  and  demand  "  will  still  operate  very 
nicely:  a  very  limited  demand  will  still 
compete  for  a  very  limited  supply. 

Prices  cannot,  at  present,  fall  below 
"  cost " — which  in  itself  is  considerable, 
mounting  with  fresh  expenditure  on  capital 
account  and  including  all  waste  and  capital 
depreciation. 

Actually,  of  course,  prices  are  very  much 
in  excess  of  the  "  cost,"  although  a  big 
percentage  of  the  surplus  profits  may  still  be 
debited  as  "  cost."  They  may  be  utilised  for 
plant  extension,  as  was  largely  done  during 
the  war,  or  counted  off  against  depreciation 
of  existing  plant,  which  plant  has  in  all 
probability  been  more  than  paid  for  by  the 
consumer  in  the  price  of  the  product. 

There  is  no  inducement  for  suppliers  to 
distribute  more  goods  at  home  than  will 
suffice  to  absorb  rapidly  the  small  reserve  of 
purchasing  power  still  in  the  hands  of  the 
public.  The  bulk  of  the  goods  produced 


130  The  New  Economics 

will  be  shipped  abroad  in  return  for  raw 
material  for  further  export.  The  manufac- 
turer-merchants have  no  inducement  to 
distribute  them  in  this  country ;  it  matters 
little  to  them,'  who  consumes  them  so  long  as 
they  obtain  payment. 

They  are  never  particularly  far-sighted  or 
versed  in  the  rudiments  of  economics,  so 
that  when  export  markets  are  exhausted  and 
works  must  close  down,  it  does  not  occur  to 
them  that  the  economic  system  is  at  fault, 
that  a  simple  distribution  of  purchasing 
power  at  home  would  set  machines  working 
at  full  pressure  to  turn  out  goods  to  meet  the 
demand,  solve  all  their  trade  difficulties,  and 
render  the  community,  including  themselves, 
contented  and  prosperous. 

Nothing  is  embedded  more  deeply  in  the 
national  unconsciousness  than  that  one  section 
of  the  community  can  only  benefit  at  the 
expense  of  another. 


CHAPTER    SIXTEEN 

THE     NEW    ECONOMICS 

WE  have  emphasised  the  fact  that  there  is 
no  reserve  of  purchasing  power,  because  it 
is  the  keystone  of  our  present  system  and 
the  explanation  of  its  breakdown.  Money 
is  returned  to  the  banks  through  the  medium 
of  prices  practically  as  rapidly  as  it  is  issued. 
An  expansion  of  credit,  in  the  form  of  a 
loan  for  industrial  development,  though  it 
appears  as  purchasing  power  in  wages, 
salaries  and  dividends,  serves  merely  to 
raise  prices,  so  that  the  amount  of  the  loan 
is  returned  to  the  banks  almost  immediately 
through  suppliers  of  the  cost  of  living  goods. 
Yet  the  amount  of  the  loan,  though  it  has 
already  been  extracted  from  the  pocket  of 
the  consumer  in  the  form  of  higher  prices, 
will  be  again  charged  to  him  in  the  cost  of 


132  The  New  Economics 

the  goods  against  which  the  loan  was  made, 
and  over  and  over  again  in  future  output  of 
the  industry  for  purposes  of  capital  expan- 
sion. 

The  consumer  is  thus  continually  in  the 
debt  of  the  bank;  since  even  the  small  pro- 
portion of  the  output  that  can  be  marketed 
at  all  in  this  country  can  only  be  paid  for  by 
the  issue  of  purchasing  power  to  the  public, 
in  the  form  of  wages,  salaries  and  dividends, 
by  means  of  a  fresh  loan — the  amount  of 
which  loan  must  be  charged  again  to  the 
consumer  in  the  price  of  the  goods  (not  yet 
made)  for  which  it  was  issued;  to  repay 
which  a  still  further  loan  will  be  necessary, 
and  so  on. 

To  maintain  the  system  at  all,  it  is 
essential,  since  there  is  hardly  any  home 
market  for  consumable  goods,  to  turn  our 
energies  to  capital  expansion.  The  money 
that  is  retrieved  from  the  consumer  as 
capital  or  overhead  charges  can  only  be 
utilised  in  the  purchase  of  fresh  capital 


The    New    Economics  133 

goods;  so  that  the  community  in  its  prices 
must  bear  the  burden  of  enormous  capital 
charges,  constantly  expanding  and  spread 
over  a  relatively  small  output. 

Potential  capacity  to  produce  is  increased 
out  of  all  proportion  to  the  effective  demand 
that  is  being  issued  in  wages,  salaries  and 
dividends.  Any  attempt  to  raise  the 
standard  of  living  for  the  poorer  sections  of 
the  community  merely  lowers  the  value  of 
the  monetary  unit  and  results  in  an  increase 
of  price  all  round.  The  standard  of  living 
of  the  small  privileged  section  of  the  com- 
munity may  be  judged  by  varying  codes. 
Up  to  a  certain  amount  their  incomes  will 
be  charitably  spent  in  providing  work  for 
those  who  cannot  live  without  it;  and  above 
that  amount,  it  will  still  be  so  spent,  for 
money  "  saved  "  (as  Mr  R.  G.  Hawtrey 
remarks)  is,  of  course,  spent — it  is  spent  on 
the  construction  of  fixed  capital  that  is  never 
likely  to  be  utilised  this  side  of  the  Styx. 

Just  as  a  man  in  debt  hopes  to  extricate 


134  The  New  Economics 

himself  by  applying  to  a  money-lender  and 
only  plunges  himself  still  more  hopelessly 
into  debt;  so  an  initial  defect  of  purchasing 
power  inherent  in  the  economic  system 
increases  with  time,  till  with  works  closing 
down  and  several  millions  of  the  population 
subsisting  on  small  unemployment  doles, 
breaking  point  is  reached  and  revolution  can 
only  be  averted  by  a  greater  calamity  still : 
the  national  energies  unable  to  turn  to  use- 
ful production  are  diverted  skilfully  to  the 
manufacture  of  weapons  of  destruction,  and 
the  manhood  of  the  country  set  out  to 
destroy  some  neighbouring  people  in  the 
same  unhappy  predicament. 

The  remedy  for  our  economic  ills,  by 
increasing  purchasing  power  and  enabling 
the  community  to  absorb  the  product  of  its 
labour,  is  so  simple,  so  easy  of  application, 
and  follows  so  obviously  from  the  diagnosis 
of  the  disease,  that  only  the  darkness  of  the 
public  mind  on  all  matters  outside  its  daily 
routine  has  prevented  it  from  being  adopted. 


The   New    Economics  135 

The  proposals  have  been  worked  out  in 
some  detail  by  Mr  Douglas  and  Mr  A.  R. 
Orage  (Editor  of  The  New  Age)  in 
"  Credit  Power  and  Democracy/'  The 
scheme  there  outlined  was  put  forward 
with  special  application  to  the  mining 
industry,  but  is  of  course  appliable  to  any 
industry. 

It  has  been  our  endeavour  to  guide  the 
reader  step  by  step  through  the  maze  of  our 
present  system,  till  he  is  in  a  position  to 
understand  these  proposals  and  appreciate 
their  significance. 

Only  unfamiliarity  with  the  principles 
they  formulate  can  render  them  difficult. 
In  essence,  they  are  simple  compared  with 
the  complexities  of  our  present  financial 
mechanism. 

If  we  have  made  these  principles  familiar 
to  the  reader^  our  task  is  accomplished,  and 
we  need  only  refer  briefly  to  the  proposals 
themselves.  The  actual  details  the  reader 
will  learn  best  from  Mr  Orage's  lucid 


136  The  New  Economics 

exposition  in  "  Credit  Power  and  Democ- 
racy." 

No  remedy  for  our  economic  ills  can  hope 
to  be  effective  that  does  not  involve  both 
consumer  control  of  credit  and  the  establish- 
ment of  the  Just  Price. 

Financial  credit  is  based  on  the  real 
credit  of  an  industry,  its  estimated  earning 
capacity,  so  that  at  present  we  pay  interest 
to  banking  companies  for  the  use  of  our 
own  credit.  Banking  is  a  very  profitable 
business,  if  you  happen  to  be  one  of  the 
:<  Big  Five."  All  that  you  require,  having 
admission  to  the  Clearing  House,  is  a  plenti- 
ful supply  of  ink,  ledgers  and  bank  clerks; 
and  whatever  may  happen  to  trade  in 
general,  your  balance  sheet  and  the  building 
business  will  bear  witness  that  you  thrive. 

It  is  suggested  that  a  Producers'  Bank  be 
formed  in  connection  with  an  industry,  on 
the  basis  of  the  real  credit  of  that  industry. 
The  shareholders  of  the  Bank  would  consist 
of  all  those  engaged  in  the  industry,  and 


The    New    Economics  137 

would  be  entitled  to  vote  at  a  shareholders' 
meeting.  The  Bank  as  such  would  pay  no 
dividend,  but  all  future  expenditure  on 
capital  account  would  be  financed  jointly  by 
the  owners  and  the  Producers'  Bank,  in  the 
ratio  which  the  total  dividends  bear  to  the 
total  wages  and  salaries;  capital  already 
invested  in  the  industry  being  entitled  to  a 
fixed  return  of  say  six  per  cent.  In  the  case 
of  reductions  in  the  cost  of  working,  one  half 
such  reduction  would  be  dealt  with  in  the 
National  Credit  Account,  the  remainder 
being  credited  equally  to  the  company 
owning  the  plant  and  the  Producers'  Bank. 

The  scheme,  it  will  be  remarked,  can  be 
applied  instantaneously ;  nothing  more 
elaborate  being  required  than  the  affiliation 
of  the  Producers'  Bank  with  the  Clearing 
House. 

The  average  miner's  wage  has  now  fallen 
to  the  starvation  level  of  two  pounds  a  week, 
and  the  "  unemployment  problem  "  (as  we 
choose  to  consider  it)  has  become  so  impera- 


138  The  New  Economics 

tive  that  even  the  provision  of  work  for  our 
unemployed  in  the  loan  of  capital  to 
Communist  Russia  cannot  avert  for  long 
the  inevitable  catastrophe. 

We  have  no  sympathy  with  senti- 
mentalism,  and  no  doubt  it  would  be  senti- 
mental to  permit  our  own  people  to 
purchase  the  product  of  their  labour  if  it 
could  be  avoided.  In  cold  fact,  it  cannot; 
assuming  it  is  not  the  business  of  industry 
to  satisfy  the  needs  of  the  population  but 
merely  to  flourish  in  an  abstract  isolated  sort 
of  way  as  a  proof  of  patriotism,  surely  it  is 
obvious  that  it  cannot  flourish  unless  there  is 
a  market,  and  that  there  cannot  be  a  market 
unless  the  means  of  payment  is  distributed. 

Regarding  the  other  factor  in  the  distri- 
bution of  purchasing  power,  that  of  price, 
the  reader  should  arrive  at  this  from  a  con- 
sideration of  our  previous  analysis.  It  is 
clear  that  price  can  no  longer  fluctuate 
according  to  the  amount  of  money  on  the 
market,  if  we  are  to  reap  the  benefit  of 


The    New    Economics  139 

cheaper  production;  since  at  present  (as  we 
have  shown)  we  are  in  fact  poorer  for  every 
increase  in  our  potential  wealth  or  capacity 
to  produce.  As  production,  or  capacity  to 
produce,  increases  relatively  to  consump- 
tion, price  must  drop;  and  as  consumption 
increases  relatively  to  production,  price  must 
rise,  since  we  are  now  living  up  to  our 
income. 

Price,  therefore,  must  be  that  proportion 
of  cost  that  the  (cost)  value  of  all  classes  of 
commodities  bears  to  the  (money)  value  of 
total  production,  consumption  including 
capital  depreciation  and  export,  and  pro- 
duction including  imports  and  of  course 
capital  appreciation. 

The  deficit  would  be  made  up  to  the 
manufacturer,  as  it  is  now,  by  a  creation  of 
credit — with  this  difference,  that  it  would  no 
longer  appear  in  the  price  of  the  product; 
we  do  not  consume  the  plant,  though  at 
present  we  do  in  fact  pay  for  it,  in  the  price 
of  the  product  and  in  higher  prices  of  cost 


140  The  New  Economics 

of  living  goods,  several  times  over.  This 
creation  of  credit  would  mean  an  actual 
increase  of  purchasing  power,  since  we  are 
richer  to  the  extent  of  the  capital  develop- 
ment or  increased  productive  power  that  it 
represents. 

The  foregoing  applies,  of  course,  only  to 
the  home  market;  goods  for  export  could  be 
sold  at  any  price  necessary  to  undercut  our 
competitors. 

It  has  long  been  a  crying  need  that 
companies  should  publish  their  costing 
accounts.  Under  our  present  costing 
system,  all  charges  on  capital  account, 
including  cost  of  upkeep  of  plant  and  an 
allowance  for  depreciation  and  waste,  are 
debited  to  the  consumer.  These  "  over- 
head charges "  are  calculated  in  various 
ways,  usually  as  a  percentage  on  the  direct 
labour  cost  for  some  specified  period.  The 
machines  may  be  in  perfect  working  order, 
jret  written  off  in  the  company's  accounts  as 
valueless,  while  charges  for  depreciation  will 


The   New    Economics  141 

continue  to  be  debited  to  the  consumer  long 
after  the  original  cost  of  the  plant  has  been 
recovered. 

All  that  is  proposed  is  a  different  and  more 
rational  system  of  costing ;  no  more  elaborate 
than  the  present  system — in  fact,  incompar- 
ably less  so,  enabling  industry  to  function 
with  perhaps  one  tenth  of  the  labour  at 
present  expended  and  with  much  greater 
efficiency.  Also,  no  section  of  the  com- 
munity would  suffer.  On  the  contrary,  all 
would  gain  by  lower  prices  and  a  revived 
demand. 

It  will  be  remarked  that  price  is  and 
should  be  a  sort  of  trade  barometer;  and 
that,  whereas  at  present,  trade  prosperity  is 
marked  by  a  rise  in  price  and  consequent 
depression,  price  regulated  by  the  above 
ratio  would  be  lower  with  a  boom  in  pro- 
duction and  "  trade  prosperity  "  could  con- 
tinue up  to  the  limits  of  our  powers  of 
consumption. 

These  proposals,  it  must  be  emphasised, 


142  The  New  Economics 

are  not  to  be  confused  with  a  state  regulation 
of  price ;  the  manufacturer  or  retailer  could 
offer  his  wares  at  any  price  he  chose,  though 
he  would  gain  nothing  by  raising  his  price, 
unless  he  sold  above  cost,  since  the  credit 
received  (representing  the  difference  between 
his  selling  price  and  the  cost  of  the  article) 
would  be  correspondingly  reduced.  To  bene- 
fit by  additional  profit,  he  must  therefore  sell 
above  cost,  bear  the  entire  cost,  include  all 
charges  in  his  selling  price,  and  find  a  market 
for  his  goods  at  the  higher  price.  Prices,  at 
present,  it  has  been  estimated,  are  roughly 
four  times  what  they  would  be  under  a  more 
rational  system  of  costing. 

Nor  are  these  proposals  to  be  confused  with 
what  is  loosely  called,  in  our  flabby  modernist 
terminology,  "  socialism  "  or  "  collectivism  " 
— state  control  of  industry.  The  purpose  of 
industry  is  to  satisfy  the  needs  of  the  com- 
munity; this,  at  present,  it  is  prevented 
from  doing,  owing  to  the  barbarous  private 
monopoly  of  the  public  credit  and  irrational 


The    New    Economics  143 

costing  system.  The  administration  of  in- 
dustry must  always  be  in  the  hands  of  those 
best  qualified  to  direct  it,  in  managerial  or 
technical  capacity ;  but  the  decision  as  to  the 
class  of  goods  to  be  produced  should  obviously 
rest  with  the  consumer. 

The  bureaucratic  administration  of  industry 
has  nothing  in  its  favour  to  recommend  it. 
Possibly,  in  the  staple  industries,  the  new 
industrial  bank  would  form  the  nucleus  of 
a  guild;  or  it  may  be,  consumer  control  of 
credit  would  give  fresh  life  to  private  enter- 
prise, in  fields  where  private  enterprise  is  best 
able  to  serve  the  community. 

What  is  clear,  beyond  any  shadow  of  doubt, 
is  that  no  form  of  industrial  organisation  can 
co-exist  with  our  present  system  of  financial 
monopoly  and  irresponsible  price  -  fixing. 
Private  enterprise  is  now  little  more  than  a 
name  for  the  corrupt  to  conjure  with ;  the 
financial  ring  is  well-nigh  impenetrable. 

The  flowering  of  our  civilisation  or  its 
complete  extinction  will  be  decided  within 


144  The  New  Economics 

the  next  few  years.  It  may  be  doubted 
whether,  in  the  history  of  our  planet,  so 
momentous  a  decision  has  ever  been  brought 
to  the  bar  of  a  public  so  little  capable  of 
judgment. 

It  seems  almost  as  though  the  magnificent 
effort  made  during  the  recent  war  has  left 
the  nation  spiritually,  mentally  and  physically 
exhausted,  in  which  semi-comatose  condition 
it  will  be  whirled  into  the  next  war — and  the 
next  world ! — a  war  that  will  have  in  it  nothing 
of  the  inevitable,  except  that  a  people  that 
can  neither  think  nor  act  must  be  prepared 
to  suffer. 

The  old  order  has  broken  down;  whether 
it  will  give  place  to  the  new  or  involve  us  in 
its  breakdown,  it  rests  with  the  present 
generation  to  decide;  and  it  has  only  a  few 
years  at  the  most  to  make  up  its  mind,  before 
night  is  upon  us. 

The  alternative,  setting  aside  the  possibility 
of  an  entire  collapse  of  the  credit-system,  on 
the  lines  of  the  Russian  debacle,  is  a  world- 


The   New    Economics  145 

war  infinitely  more  terrible  than  the  last,  and 
which  will  in  all  probability  spell  the  end  of 
western  civilisation. 

Sometime,  somewhere,  if  humanity  is  to 
survive,  these  proposals  will  be  adopted ;  the 
problem  of  the  Just  Price  is  the  final  pro- 
blem posed  by  the  historical  Sphinx,  and  the 
nations  that  cannot  solve  it  must  perish. 


K 


BOOKS  ON  ECONOMICS 

Major  C.  H.  DOUGLAS 

Economic  Democracy.  By  Major  C.  H.  DOUGLAS.  Second  and 
Revised  Edition.  Cr.  8vo.  cloth.  6s.  net. 

Credit  Power  and  Democracy,  with  a  Draft  Scheme  for  the 
Mining  Industry.  By  Major  C.  H.  DOUGLAS.  With  a  Commentary 
on  the  included  Scheme  by  A.  R.  ORAGE.  Second  and  Revised 
Edition.  Cr.  8vo.  cloth.  7s.  6d.  net. 

The  Control  and  Distribution  of  Production.  By  Major 
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The   Douglas  Theory:  a   Reply  to   Mr  J.   A.  Hobson. 

By  Major  C.  H.  DOUGLAS.    Sewed.    6d.  net. 

W.  ALLEN  YOUNQ 

Dividends  for  All,  Being  an  Explanation  of  the  Douglas  Scheme 
for  Solving  the  Industrial  Crisis,  by  Rescuing  the  Nation  from  the 
Financial  Morass  and  Setting  it  on  the  Road  to  Prosperity.  By 
W.  ALLEN  YOUNG.  Cr.  8vo.  sewed.  6d.  net. 

N.  D.  S. 

It's  Like  This  ...  By  N.  D.  S.  Dealing  with  the  Douglas 
New-Age  Scheme.  Sewed.  6d. 

HILDBRIC  COUSENS 

A  New  Policy  for  Labour.  An  Essay  on  the  Relevance  of 
Credit  Power.  By  HILDERIC  COUSENS.  Cr.  8vo.  5s.  net.  A  book 
designed  to  be  a  topical  introduction  to  the  ideas,  economic  and 
social,  of  Major  C.  H.  Douglas. 

ARTHUR  KITSON 

Unemployment :  the  Cause  and  a  Remedy.  By  ARTHUR 
KITSON.  Cr.  8vo.  5s.  net. 

M.  B.  RECKITP  and  C.  E.  BECHHOFFER 

The  Meaning  of  National  Guilds.  By  MAURICE  B.  RECKITT 
and  C.  E.  BECHHOFFER.  Second  and  Revised  Edition,  with  a 
Preface  and  a  New  Chapter  on  Current  Problems.  Demy  8vo 
8s.  6d.  net. 

Q.  R.  STIRLING  TAYLOR 

Guild  Politics:  a  Practical  Programme  for  the  Labour 
Party  and  the  Go-operators.  By  G.  R.  STIRLING  TAYLOR,  Barrister- 
at-Law.  Cr.  8vo.  Boards,  3s.  6d.  net;  cloth,  6s.  net. 

LONDON:    CECIL    PALMER,    BLOOMSBURY    STREET,    W.C.i 
OTHER    LITERATURE    FOR    STUDY 

ARTHUR  KITSON 

A  Fraudulent  Standard.        The  Money  Problem. 

R.  Q.  HAWTREY 

Currency  and  Credit. 

The  New  Age.        Weekly  7d.        38  CURSITOR  STREET,  E.C.4 
Public  Welfare.        Monthly  3d.       20  RECTORY  ROAD,  BARNES 


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